What’s Inside the Annual Report to Shareholders ………………………………………………………..13
Who Reads the Annual Report to Shareholders …………………………………………………………..14
The Battle of the Covers …………………………………………………………………………………………..16
Coca Cola vs. Pepsi …………………………………………………………………………………………………………… 16
Marriott International vs. InterContinental Hotels Group ………………………………………………………….. 18
Darden Restaurants vs Yum! Brands ……………………………………………………………………………………. 18
Choosing a Company ………………………………………………………………………………………………20
Pick a company you like ……………………………………………………………………………………………………… 20
Public Companies………………………………………………………………………………………………………………. 20
Reports You Will Need …………………………………………………………………………………………….21
Annual Report to Shareholders and How to Find Them ………………………………………………………….. 21
SEC Form 10-K ………………………………………………………………………………………………………………….
22
Organization of the Form 10-K …………………………………………………………………………………………. 22
Where to find the Form 10-K for your Company …………………………………………………………………. 23
How does it look …………………………………………………………………………………………………………….. 24
Proxy Statement ………………………………………………………………………………………………………………… 27
Where to find it ………………………………………………………………………………………………………………. 28
NAICS, “son of SIC” ………………………………………………………………………………………………..28
SIC …………………………………………………………………………………………………………………………………… 28
NAICS ………………………………………………………………………………………………………………………………. 28
EDGAR …………………………………………………………………………………………………………………………….. 30
Identifying Competitors ……………………………………………………………………………………………………….. 31
Chapter 2: The Basic Information …………………………………………………………… 32
Question 2.0 – What Do You Want To Learn About the Company and Why ………………………….. 32
Question 2.1 – Fundamental Information Set For Your Company …………………………………………. 33
Question 2.2 – The Marketplace Context …………………………………………………………………………… 34
Management Challenges and Success ………………………………………………………………………36
Marketplace Issues …………………………………………………………………………………………………39
Question 2.3 – Challenges and Success for Your Company ………………………………………………… 45
Chapter 3 – The Chairman and Management Speak ……………………………………. 47
Analyzing The MD&A Items ……………………………………………………………………………………..47
Management speaks for Perrigo ………………………………………………………………………………………. 48
Question 3.1 – What is Management saying about your company? ……………………………………… 50
Analyzing the Message to Shareholders …………………………………………………………………….51
Why is it Important ……………………………………………………………………………………………………………… 51
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What to expect …………………………………………………………………………………………………………………… 54
Question 3.2 – What did the Chairman say? ……………………………………………………………………… 58
Corporate Transparency ………………………………………………………………………………………….59
SOX …………………………………………………………………………………………………………………………………. 59
The Role of the Independent Auditor ……………………………………………………………………………………. 60
Question 3.3 – Internal Controls and Auditors ……………………………………………………………………. 60
Chapter 4 – Where are the Numbers ……………………………………………………….. 62
The Balance Sheet ………………………………………………………………………………………………….62
Fiscal Year ………………………………………………………………………………………………………………………… 63
Question 4.0 – What is your company’s fiscal year …………………………………………………………….. 63
What does the Balance Sheet tell about the Company?………………………………………………………….. 64
Balance Sheet Structure …………………………………………………………………………………………………….. 64
Assets …………………………………………………………………………………………………………………..64
Current Assets …………………………………………………………………………………………………………………… 64
Question 4.5 – How much stock is there? …………………………………………………………………………. 74
Question 4.6 – Who owns the stock? ……………………………………………………………………………….. 75
Question 4.7 – First look at the company’s strength ……………………………………………………………. 76
Question 4.8 – Significant changes in the balance sheet …………………………………………………….. 76
Question 4.9 – Significant changes in the cash account ……………………………………………………… 77
Question 4.10 – Debt to equity and the competition ……………………………………………………………. 77
Income Statement …………………………………………………………………………………………………..78
Question 4.11 – ‘Income statement’. What’s in a name? ……………………………………………………. 78
Structure of the Income Statement ……………………………………………………………………………………….. 78
Operating Section ………………………………………………………………………………………………………………. 79
Question 4.12 – How does your company report the core business? ……………………………………. 81
Question 4.13 – How does your company describe its business income? ……………………………… 82
Question 4.14 – Irregular items. Good or Bad? …………………………………………………………………. 84
Net Income ……………………………………………………………………………………………………………………….. 85
Question 4.15 – The big questions. Are they makin’ money? Are they lookin’ good? …………….. 85
Question 4.16 – Which trend is important and why? …………………………………………………………… 87
Statement of Cash Flows …………………………………………………………………………………………
88
Who reads it and why? ……………………………………………………………………………………………………….. 88
Structure for the Statement of Cash Flow ……………………………………………………………………………… 88
AMD and the crunch …………………………………………………………………………………………………………… 89
Question 4.17 – How strong is your company’s cash position? ……………………………………………. 90
Question 4.18 – How well can your company pay its bills? ………………………………………………….. 91
Question 4.19 – How leveraged is your company? …………………………………………………………….. 92
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Statement of Shareholders’ Equity …………………………………………………………………………….93
Structure for the Statement of Shareholders’ Equity ……………………………………………………………….. 93
Question 4.20 – How well does your company invest in its future? ………………………………………. 95
Question 4.21 – Capital and Treasury Stock ……………………………………………………………………… 95
Notes to the Financial Statement ………………………………………………………………………………97
What can you find in the Notes? ………………………………………………………………………………………….. 97
Question 4.22 –Basic information about your company not found on the financial statement? …. 98
Question 4.23 –Other significant information about your company not found on the financial
statement? ……………………………………………………………………………………………………………………. 98
Chapter 5 – Looking Under the Hood of Your Annual Report ……………………….
100
Industry and Competitor Ratios ……………………………………………………………………………………… 101
How well can your company pay the bills? ……………………………………………………………….. 101
Question 5.1 – Working Capital Balance …………………………………………………………………………. 101
Question 5.2 – Acid Test or Quick Ratio ………………………………………………………………………….. 102
Question 5.3 – Current Ratio …………………………………………………………………………………………. 103
Question 5.4 – Cash Ratio …………………………………………………………………………………………….. 104
Is your company making money? ……………………………………………………………………………. 104
Question 5.5 – Return on Sales Ratio …………………………………………………………………………….. 105
Question 5.6 – Return on Equity Ratio ……………………………………………………………………………. 105
Question 5.7 – Return on Assets Ratio ……………………………………………………………………………. 106
Question 5.8 – Asset Turnover Ratio ………………………………………………………………………………. 107
Question 5.9 – Gross Profit Margin Ratio ………………………………………………………………………… 107
How well is management performing ……………………………………………………………………….. 108
Question 5.10 – Inventory Turnover Ratio ……………………………………………………………………….. 108
Question 5.11 – Days in Inventory Ratio …………………………………………………………………………. 109
Question 5.12 – Accounts Receivable Turnover Ratio ………………………………………………………. 110
Question 5.13 – Average Collection Period ……………………………………………………………………… 111
Question 5.14 – Accounts Payable Turnover Ratio …………………………………………………………… 111
Question 5.15 – Net Working Capital Turnover Ratio ………………………………………………………… 112
How much can your company borrow ……………………………………………………………………… 113
Question 5.16 – Debt to Equity Ratio ………………………………………………………………………………. 114
Question 5.17 – Debt to Asset Ratio ……………………………………………………………………………….. 114
Question 5.18 – Gearing Ratio or Long Term Debt to Shareholders’ Equity Ratio ………………… 115
Question 5.19 – Interest Coverage Ratio or Debt Service Ratio …………………………………………. 116
How is the stock performing? …………………………………………………………………………………. 117
Question 5.20 –Earnings per Share ………………………………………………………………………………… 117
Question 5.21 – Price/Earnings Ratio ……………………………………………………………………………… 118
Question 5.22 –Dividend per Share ………………………………………………………………………………… 118
Question 5.23 – Dividend Payout Ratio …………………………………………………………………………… 119
Chapter 6 – Buy, Sell, Hold or Stay Away ………………………………………………… 121
• Other information deemed relevant to stakeholders may be included, such as a report on
operations for manufacturing firms.
The Annual Report to Shareholders is not just about the numbers. An Annual Report to
Shareholders will often include narratives, notes and descriptions about issues that are significant
to the company. They narratives also help to provide the public with an appropriate level of
disclosure about the financial state of the company. Typically, most Annual Reports to
Shareholders will include:
• Chairman’s report or Message to Shareholders
• CEO’s report
• Auditor’s report on corporate governance
• Mission statement
• Corporate governance statement of compliance
• Statement of directors’ responsibilities
• Invitation to the company’s Annual Shareholder’s Meeting
Who Reads the Annual Report to Shareholders
If an Annual Report to Shareholders were used and read only by financial analysts most likely it
would be much different. If an Annual Report to Shareholders were only about the numbers then
it might cost less to produce and only contain tables, graphs and statistics. Like a Byzantine
Icon, an Annual Report to Shareholders is glimpse into the soul of a company. It is a way for
the company to portray itself to its many constituents. The Annual Report to Shareholders is for
many companies a defensive, offensive, competitive and marketing tool. It is another arrow in a
company’s strategic quiver.
Knowing the company’s constituents is an important part of understanding the Annual Report to
Shareholders. It will explain why and how issues are presented and described in the Annual
Report to Shareholders. The company communicates with its constituents through the Annual
Report to
Shareholders.
• It clearly states the mission of the company is a way to allow others to adopt and share it
as their own. A shared mission unites and focuses the company’s constituents. A well-
defined mission is the basis for any successful marketing campaign.
• There are unfulfilled needs in every market. Every company has weaknesses. Both the
unfilled needs and weaknesses are opportunities for success. Often success for a
company is disguised as problems waiting for solutions. The Annual Report to
Shareholders provides the company with an opportunity to clearly, honestly, and
honorably describe the problems facing the company and the solutions. Transparency in
presenting issues and solutions creates confidence for the company’s constituents.
Page 15
The constituents of a public company are varied in their agenda, mission, location, significance,
aggressiveness, strength and size. They can be supportive or destructive to the company. Their
agendas and missions can be conflicting and incompatible with each other and the company.
Typical constituents for a public company include:
“8 Billion $ profit are not enough to
preserve my job.”
Video 5 United Airlines employees protect shareholder meeting
Video 6 ETQ Corp. shareholders thrown out of meeting
Page 16
Video 7 Community leaders protest Chevron shareholder meeting
Each group has its own agenda and reads the Annual Report to Shareholders from their
perspective. The information in the annual report can be used to support their position with the
company and further their agenda. Their position or agenda may or may not be favorable to the
company. In communicating with all its constituents through the Annual Report to Shareholders
the company must be clear, honest and honorable. Doing this while also protecting the best
interests of the company is challenging task and the hallmark of an effective Annual Report to
Shareholders.
The Battle of the Covers
Often the Annual Report to Shareholders cover signals the direction of the annual report. It
might also be a response to a significant issue confronting the company. Other covers mirror the
current year competitive theme. Comparing the annual report covers of competitive companies
can often create insight into a company’s strategy for the year. Often, the cover might represent
a graphical introduction to the Chairman’s message.
Coca Cola vs. Pepsi
The cover for the Annual Report to Shareholders of committed competitors Coca Cola and
Pepsi Cola quickly show the strategic differences between the companies. The Coke theme
is ‘Buy. Drink. Smile”. The Pepsi theme is “We are Performance with Purpose”. In 2008, the
following issues confronted Coca Cola and Pepsi Cola. The Coca-Cola Company and its
products have been criticized by various sources for various reasons including negative
health effects resulting from consumption of its products, exploitative labor practices,
marketing unhealthy products to children and other claims. Increasing global market share is
a significant objective for Coca Cola.
The Indian Government alleges there are high levels of pesticides found in the Pepsi Cola
sold in India. Pepsi Cola is projecting a ‘food’ rather than beverage image for itself.
Marriott International vs. InterContinental Hotels Group
The cover for the Annual Report to Shareholders of competitors Marriott International and
InterContinental Hotels Group quickly show the strategic differences between the companies.
The Marriott’s theme is ‘People Places Purpose”. The InterContinental Hotel theme is “Great
Hotels Guests Love”. In 2008, both hotel chains are competing to retain their market share in
a difficult economy. Fuel costs and a sluggish economy increased the vacancies for both
hotel chains. Their annual report covers are directed at reinforcing their individual niche. The
covers clearly describe the part of the market each chain is claiming for itself.
Marriott
staking out the business traveler and Holiday Inn claiming the family market.
Video 9 Marriott Hotel marketing 2019
Video 10 Intercontinental Hotel marketing 2019
Darden Restaurants vs Yum! Brands
The cover for the Annual Report to Shareholders of rivals Darden Restaurants and
Yum! Brands quickly show the different markets each company targets. The Darden
theme is ‘Back to Basics”. The Yum! Brand theme is “Feed the World”. In 2015, both
restaurant chains were working to demonstrate a viable and expanding target market.
With the 2010 deep recession in the past, the companies are pointing their strategies
http://investor.shareholder.com/mar/default.cfm
http://www.ihgplc.com/index.asp?pageid=3
Page 19
toward bringing more customers into their dining rooms. Their annual report covers
concentrate on emphasizing the growing strength they have in their target markets.
Darden is focused on culinary innovation and an outstanding guest experience. Yum!
Brands is committed to building three global, iconic brands people around the world
can trust and champion.
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Choosing a Company
Understanding how to read an Annual Report to Shareholders can help you in many ways. It can
be an invaluable tool for making informed investment decisions. As an employee it can help to
better understand the direction and strategy for your employer. Analyzing the Annual Report to
Shareholders of a competitor can help you better understand the issues confronting your
company. When you complete this workbook you should have a better understanding of your
project company. Your work will also help you to analyze and understand the Annual Report to
Shareholders of any other company. It will help you create a strong set of useful analytical skills
to assist you in making informed business decisions.
Pick a company you like
The first step in learning how to analyze an Annual Report to Shareholders is to select a
company. It is important to pick a publicly traded company that interests you. Some likely
choices are:
• Your employer
• A significant competitor for your employer
• A company you would like for an employer
• The company selling a product you like
• The company developing a technology that interests you
• A company you believe would be a good investment for you
Some publicly traded companies that may not be the best choice for you are
companies regulated by a government agency. These companies will generally
use an accounting system required by the regulatory agency. Regulatory
accounting systems will often have a definitive number format for the chart of
accounts. They also incorporate depreciation schedules that may differ from
other industries. Some agencies like the Federal Communication Commission
and the U.S. Department of Housing and Urban Development also require a
unique format for financial reporting. Utilities, banks, railroads and insurance
companies are examples of regulated companies with unique financial reporting
requirements.
Public Companies
Publicly traded companies must comply with the reporting requirements of the SEC. Companies
traded on a United States stock exchange must prepare an Annual Report to Shareholders and
also file a Form 10k with the SEC. The company must be traded on any of the following stock
exchanges. Each exchange maintains a directory of its listed companies. Following is a list of
United States stock exchanges and their websites.
• NYSE Euronext includes the former New York Stock Exchange (NYSE), the NYSE
American and the Euronext
• NASDAQ: The National Association of Securities Dealers Automated Quotation Stock
Exchange.
• NYSE Chicago
http://www.fcc.gov/
http://www.hud.gov/
http://www.nyse.com/
http://www.amex.com/
http://www.amex.com/
http://www.euronext.com/
http://www.nasdaq.com/
http://www.chx.com/
Page 21
Video 11 Take a look inside Wall Street
Reports You Will Need
There are two type reports you will need to complete your Annual Report Project. The first
report type is the Annual Report to Shareholders for your company and the other report type is
the SEC Form 10K for your company. The internet makes it easy to locate both types of reports.
Annual Report to Shareholders and How to Find Them
You can find the Annual Report to Shareholders for your company in two ways. The first is to
go the official website for your company and locate the ‘Investors’ page. Most public companies
will have a web page similar to Stanley Black & Decker specifically for investors. From the
investor page you should be able to locate and download a PDF file of the Annual Report to
Shareholders for your company.
There are several websites that archive public company annual reports. You may also be able to
get your company’s Annual Report to Shareholders from these websites:
http://www.sec.gov/edgar/searchedgar/webusers.htm
http://www.annualreports.com/
http://www.annualreportservice.com/
This project will require that you perform several five-year trend analyses. You will want to
download the annual reports for the last three years. One annual report can give you a good view
of a company’s current financial performance. The annual report for each of the previous three
years can help you give you a better understanding of the performance trends for your company.
https://www.stanleyblackanddecker.com/investors
http://www.sec.gov/edgar/searchedgar/webusers.htm
http://www.annualreports.com/
http://www.annualreportservice.com/
Page 22
You will find it easier to complete your project if you download your annual reports in PDF
format.
SEC Form 10-K
To remain compliant with the federal securities laws a publicly traded company must disclose
information on periodic basis. Public traded companies must submit annual reports to the SEC
in a special format. The annual report submitted to the SEC is completed on the SEC Form 10-
K. Quarterly reports on completed on SEC Form 10-Q. The SEC annual report format provides
a standard method for reporting financial information. This allows for easier comparison of
financial information between companies. It also makes analysis and oversight of the financial
information easier.
A Form 10-K must be submitted within 90 days after the end of the fiscal year covered in the
annual report, unless the company qualifies for accelerated filing. Each accelerated company
must submit its Form 10-K based on the float for the company. The term “float” refers to the
regular shares that a company has issued to the public that are available for investors to trade.
This figure is derived by taking a company’s outstanding shares and subtracting from it any
restricted stock. Following are the Form 10-K filing times.
Deadlines For Filing Periodic SEC Reports
Float for Filer Form 10-K Deadline Form 10-Q Deadline
Large Accelerated Filer ($700MM or
more)
75 days for fiscal years ending
before December 15, 2006 and
60 days for fiscal years ending
on or after December 15, 2006
40 days
Accelerated Filer ($75MM or more
and less than 700MM)
75 days 40 days
Non-accelerated Filer (less than
$75MM)
90 days 45 days
While the “annual report to shareholders” published by a public company and the annual report
on Form 10-K have similar names they are separate reports. The Form 10-K contains
comprehensive information on the company in general such as its products, sales, markets, risks,
officers, directors, and other areas. The Form 10-K is organized into four parts.
Organization of the Form 10-K
The Form 10-K is organized into four parts. The first part describes the business of the
company, an examination of the significant risks facing the company, a description of the legal
proceedings engaged by the company and other matters. Part two of the Form 10-K includes the
financial statements, management’s description of the financial and operating condition of the
company and the value of the company’s publicly traded shares. Part three includes a list of the
directors and officers, the compensation paid to these people, the shares held by these people and
the shares given as compensation to people. Part four includes additional financial data, reports,
charts and statements supporting the filing.
Part I
Item 1 Business.
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Item
1A
Risk Factors.
Item
1B
Unresolved Staff Comments.
Item 2 Properties.
Item 3 Legal Proceedings.
Item 4 Submission of Matters to a Vote of Security Holders
Part II
Item 5 Market for Registrant’s Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities.
Item 6 Selected Financial Data.
Item 7 Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Item
7
A
Quantitative and Qualitative Disclosures About Market Risk.
Item 8 Financial Statements and Supplementary Data.
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
Item
9A
Controls and Procedures.
Item
9B
Other Information.
Part III
Item
10
Directors, Executive Officers and Corporate Governance.
Item
11
Executive Compensation.
Item
12
Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.
Item
13
Certain Relationships and Related Transactions, and Director
Independence.
Item
14
Principal Accounting Fees and Services.
Part IV
Item
15
Exhibits, Financial Statement Schedules.
Where to find the Form 10-K for your Company
You can find the Form 10-K for your company in two ways. The first is to go the official
website for your company and locate the ‘Investors’ page. Most public companies will have a
Page 24
web page for investors. From the investor page you should be able to locate and download a
PDF file of the Form 10-K
for your
company.
The other way is to use of the following websites that archive the Form 10-K for public
companies.
• The SEC EDGAR website. You can search for company information filed with the SEC
from this website.
• The MSN Money website. Enter your company’s official name. Select SEC Filings.
This project will require that you perform several multi-year trend analyses. You will want to
download the Form 10-K for each of the last three years. One Form 10-K can give you a good
view of a company’s current financial performance. The Form 10-K for each of the previous
three years can help you give you a better understanding of the performance trends for your
company. You will find it easier to complete your project if you download your Form 10-K in
PDF format.
How does it look
The Form 10-K and the Annual Report to Shareholders are different. They have different
purposes even though they both report similar information. The two reports look different. The
SEC Form 10-K uses a format defined by the SEC. Companies must use this format. Aside
from the data contained in the form, every Form 10-K looks very much like every other Form
10-K.
The Annual Report to Shareholders is more than a financial report. For many companies it is a
statement defining the company’s market strategy. It is definition of the company’s mission,
position, initiatives and commitments. Many companies use their annual reports to present a
This part of your project is focused on gathering the fundamental information about your
company and its industry. Placing your company in the context of its competitive, political,
technological, and social context is important to understanding why it performs as it does. It can
also help to understand how it might perform in the
future.
The fundamental information about your company may be found on both the Annual Report for
Shareholders and the Form 10-K or it may be only on one of the reports. However, some of the
information may not be on either report.
Question 2.0 – What Do You Want To Learn About the Company and Why
Setting goals for selecting your company is an important part of this project. It will help you
choose what you want to learn from this project. By knowing precisely what you want to learn
about your company, you know where you have to concentrate your efforts. You’ll also quickly
spot the distractions that would otherwise lure you from your course. More than this, properly
identifying what you want to learn can be incredibly motivating. You’ll find that your self-
confidence builds faster when you are meeting your expectations.
Be precise as possible about what you want to learn. If you do this, you will know exactly when
you have achieved the objective and can take complete satisfaction from having achieved it.
Prioritize what you want to learn about your company. Sort what you want to learn by order of
importance. The most important things to learn should be focused on first, and those of lesser
importance can be accomplished once the others are completed.
List up to four things you want to learn about your company by the priority of importance. Next
to each item you want to learn about your company, explain why you want to learn it.
CHAPTER
2
Page 33
2.0 – What Do You Want To Learn About the Company and Why?
Priority What do you want to learn? Why do you want to learn it?
A
B
C
D
Question 2.1 – Fundamental Information Set For Your Company
The answer to the following questions may be found in either the Annual Report to Shareholders
or on the SEC Form 10-K. It may also be necessary for you to use other sources. To fully
answer the questions, you must identify the source for your information and also include the
answer. If the question is not applicable to your company, place “NA” as the answer. To
identify the source use “AR” for Annual Report to Shareholders and “10K” for the SEC Form
10-K. If something else, use “Other” and include the identification at the end of your answer.
2.1 – Fundamental Information Set For Your Company
Question Source Answer
A
What is the official company
name?
B
What is Company
headquarters address?
C
What is the Executive Office
telephone number?
D
What is the Investor
Relations telephone number?
E What is the official company
website?
F What is the fiscal year ending
date?
G State of incorporation
H What government agency,
other than the SEC, has a
significant impact on your
Company?
I What is the trading symbol for
your Company’s common
stock?
J Which stock exchange lists
the common stock for your
Company?
K What is the name of the stock
transfer agent for your
Company?
L What is the Par Value for the
common shares of your
Company?
M What is the number of
common shares outstanding?
N In the past 3 years what is
the highest trading price for
the common stock for your
company.
O In the past 3 years what is
the lowest trading price for
the common stock for your
company?
Page 34
P How many members are on
the Board of Directors?
Q How many Board Members
are present or past
employees of the Company?
R How many are Board
Members are from outside
your Company?
S Which industries or
institutions do the outside
Board Members represent?
T How many subsidiaries are
directly or indirectly controlled
by your Company?
U How many subsidiaries have
jurisdictions outside the
United States?
Question 2.2 – The Marketplace Context
If analyzing a company’s performance were only about the numbers, predicting the performance
of a company would be easy. Performance, success and failure are outcomes that are affected
by the marketplace. Your company does not exist inside a vacuum. It lives alongside other
companies actively struggling to protect existing customer relationships and working to create
new customers. Often companies will compete for the same customers. Companies with
similar products compete directly and use the same SIC code. They use the same SIC code.
Your company’s SIC code can help you identify its competitors. They will have the same SIC
code. Other companies compete indirectly with alternative products or technologies making it
difficult to identify competitors. Consider FedEx with both direct and indirect competitors.
Video 14 Indirect competition
FedEx Direct Competitors
FedEx Indirect Competitors
Personal Fax Machine Document Scanner and
Email
Fax and Email service
http://www.ups.com/
http://www.dhl.com/
http://www.usps.com/
Page 35
The answer to the following questions may be found in either the Annual Report to Shareholders
or on the SEC Form 10-K. It may also be necessary for you to use other sources. To fully
answer the questions, you must identify the source for your information and also include the
answer. If the question is not applicable to your company, place “NA” as the answer. To
identify the source use “AR” for Annual Report to Shareholders and “10K” for the SEC Form
10-K. If something else, use “Other” and include the identification at the end of your answer.
2.2 – The Marketplace Context
Question Source Answer
A
What is the Standard Industrial
Classification and the SIC Code for
your company? List all that may
apply?
B
What is the company’s primary
product, product group or business
segment?
C
Is there a single customer that
accounts for more than 10% of total
net sales?
D
What is the major customer profile for
your company?
E Is there a competitor larger than your
Company?
F Which company is the most significant
competitor for your Company?
G What is the country of origin for this
competitor?
H During the past 2 years, has your
Company launched a significant new
product or service? If yes, what is the
product or service?
I During the past 2 years, has your
company entered a new market? If
yes, what is the market and where is
located?
J During the past 2 years, has your
Company launched a new
technology? If yes, what is it?
K What are the technological issues for
your Company? How are they
described?
http://www.officedepot.com/
Page 36
Management Challenges and Success
For an entrepreneur, a problem is an issue waiting for a solution. The principal challenge for
management is to create solutions for issues that continue to improve the health and competitive
position of the company. The history of business is illuminated by bold leaders who were able to
transform their companies. Facing overwhelming challenges they lead their company to new
financial security and the opportunity to capitalize on enormous potential. They were able to
identify the powerful and valuable resources in their company and use those resources to
leverage the company into a new paradigm. By altering the context of the company they were
able to recreate it as if it were a rising Phoenix.
Legendary bold leaders, facing enormous challenges and successfully transformed his company
are:
• George Dively, Chairman, Harris Corporation
• Lee Iacocca, Chairman, Chrysler
• Lou Gerstner, Chairman, IBM
• Mark Zuckerberg, Founder and Chairman, Facebook
• Larry Page, Founder, Chairman, Google
• Howard Schultz, Chairman, Starbucks
George Dively, Harris Corporation
Through a bold and daring acquisition strategy, he
transformed his company from producing a product
with a vanishing future into a technology leader in
electronics and communications with unlimited
potential. The company sold offset lithographic
presses, envelope presses, paper cutting machines,
bindery equipment, and hot metal typesetting
machines. Dively created the foundation to
transform his company into the electronics and
technology leader it is today.
“The leader must effect change, he must make
things happen.”
Video 15 Lee Iacocca reinventing Chrysler in 1992
Lou Gerstner, IBM
Under his guidance, IBM cut billions in expenses through
massive layoffs and raised cash by selling assets.
Gerstner says that few people even understood how
perilously close the firm was to run out of cash. He
managed to change a culture that was inbred and
ingrown. Early on, he decided that the whole of IBM was
greater than the sum of its parts. Many of the company’s
operations were far-flung and operated independently.
There was little accountability. Rather than work together
as a team, Divisions competed against each other both
internally and in the field. The company was dangerously
preoccupied with itself rather than customers. Gerstner
changed the culture of the company to more customer
focused and operate as a unified enterprise.
“Watch the turtle. He only moves forward by sticking his
neck out.”
Video 16 Lou Gerstner speaks about IBM
Lee Iacocca, Chrysler
After becoming Chairman, Iacocca realized the
situation was even worse than he had imagined. He
cut inventory, renegotiated contracts with car rental
agencies, laid off workers and brought in a new
team of top talent. He cut his salary to $1 a year.
When no bank would finance the company, Iacocca
went to Washington D.C. and got a $1.2 billion loan
guarantee from the government. Iacocca captured
the minivan market. With the acquisition of
American Motors, he made the AMC Jeep a top
seller.
“So what do we do? Anything. Something. So long
as we just don’t sit there. If we screw it up, start
over. Try something else. If we wait until we’ve
satisfied all the uncertainties, it may be too late”
Born on May 14, 1984, in White Plains, New York, Mark
Zuckerberg co-founded Facebook, the social-networking
website, out of his college dorm room. He left Harvard
after his sophomore year to devote himself to developing
the site. Since then, the user base has grown to more
than 250 million people. Facebook made Zuckerberg a
billionaire.
Time magazine named him Person of the Year in 2010,
and Vanity Fair placed him at the top of their New
Establishment list. Forbes also ranked Zuckerberg at No.
35, beating out Apple CEO Steve Jobs, on its “400” list.
The magazine estimates his net worth to be $6.9 billion.
“I think a simple rule of business is, if you do the things
that are easier first, then you can actually make a lot of
progress.”
Video 17 Mark Zuckerberg interview 2019
Larry Page, Google
Larry Page is now the CEO of Alphabet, a new publicly
traded parent company which includes Google, the
Google X lab, and businesses such as Calico, Nest and
Fiber as subsidiaries. In August 2015, he handed over his
Google CEO post to Sundar Pichai, Google’s product
czar. Alphabet stock hit an all-time high in December 2015
surpassing Apple as the world’s most valuable company.
Page cofounded Google in 1998 with fellow Stanford
Ph.D. student Sergey Brin and was its first CEO until
2001. After serving as president of products, he took the
helm again in 2011.
“If you’re changing the world, you’re working on important
things. You’re excited to get up in the morning.”
Video 18 Larry Page speaks about Google
Howard Schultz, Starbucks
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When Howard Schultz got into the coffee business thirty
years ago, it was with one goal in mind: to enhance the
personal relationship between people and their coffee.
He’s now responsible for Starbucks, one of the world’s
most beloved brands, and worth at least $3 billion as
chairman and CEO of the Fortune 500 Company. It
wasn’t an easy path to the top for him. Schultz came from
a “working poor” family in the Brooklyn projects. He
overcame adversity and grew a small quaint Seattle
coffeehouse into the largest coffee chain on Earth. As of
2015, Starbucks has 22,519 stores operating in 70
countries.
“I think if you’re an entrepreneur, you’ve got to dream big
and then dream bigger.”
Video 19 Howard Schultz speaks about Starbucks
Marketplace Issues
Companies the size of your company can create issues that affect the marketplace and are
affected by issues emanating from the marketplace. These issues are identified in the Annual
Report to Shareholders and in the SEC Form 10-K. The impact and significance of the issue is
often not apparent when it is first reported. Marketplace issues will have an impact on the
performance and financial health of the company. The following areas represent some of the
significant marketplace issues for a company.
Marketplace Issue Categories
Products Officers, Directors Investors
New product announcements Officer resignation, retirement Dividends
New market announcements Director resignation,
retirement
minor announcement in the 2007 SEC Form 10-K did not remotely describe the enormous
impact it would have on the company. Apple sold 20 million iPhones in 2009. From zero to 20
million iPhones in 2 years is phenomenal product growth by any measure.
Video 20 Steve Jobs on core values
Walmart, Inc.
In 2015, Walmart employed almost 2 million people. That is about as many men, women and
children who live in Cincinnati OH, or Las Vegas NV, or Kansas City MO or Cleveland OH.
Imagine if every adult in Cincinnati was employed by a company and most of them were not
happy about their pay rate, their benefits or the number of hours they worked. What if many of
the women in Cincinnati believed they were paid less than the men and they were generally
treated without employment equality? The Cincinnati example illustrates the magnitude of the
Walmart issue.
The growing dissatisfaction Walmart employees feel has become more vocal and visible over the
years. It became increasingly more difficult for Walmart to keep a lid on employee
dissatisfaction. The ubiquitous cellphone with its photo, video, text messaging and YouTube
video capabilities has dramatically increased public awareness of these issues.
Walmart’s two major marketing messages are being challenged by employee YouTube uploads.
For many years, it was enough for low prices and easy access to push the company’s
performance upward keeping Wall Street and shareholders happy. However, as employees
became more vocal and visible, customers began sympathizing with the employees and buying
less. Walmart performance began sliding downward and has not been what it was.
Video 21 Walmart employee protest wages
Walmart has been notorious for paying low wages, doing what it can to avoid supplying workers
with insurance and benefits, and for squashing union talk. Management’s decision to revise
employee wages and hours appears to be well received not only by the employees but also by
Wall Street, shareholders and customers. Higher foot traffic seemed to be finding its way back
to Walmart, after Management revised employee wages and hours.
Product, Company Annual Report
Description
Outcome
Abercrombie & Fitch
2004 Annual Report
Race and sex discrimination
In 2003, an action was filed in the
United States District Court for
the Northern District of California
on behalf of a purported class
alleged to be discriminated
against in hiring or employment
decisions
“Abercrombie & Fitch, one of the
nation’s trendiest retailers, settled
race and sex discrimination
lawsuits yesterday, agreeing to
alter its well-known collegiate, all-
American – and largely white –
image by adding more blacks,
Hispanics and Asians to its
Page 42
due to race and/or national origin.
The plaintiffs in this action
sought, on behalf of their
purported class, injunctive relief
and
unspecified amounts of economic,
compensatory and punitive
damages.
Two other purported class action
employment discrimination
lawsuits were subsequently filed
in the United States District Court
for the Northern District of
California, both on November 8,
2004.
marketing materials.” The
company was to pay $40 million
to several thousand minority and
female plaintiffs.
New York Times, November 17,
2004
The Consent Decree specifically
requires that Abercrombie must
“reflect diversity, as reflected by
the major racial/ethnic minority
populations of the United States,
in its marketing materials (taken
as a whole).” Not only must
Abercrombie change its
recruitment and hiring practices
so as to avoid discrimination, but
it must also avoid the appearance
of discrimination in its marketing
materials. The former all white
“A&F look” is to be no more.
Abercrombie now must include
African-American, Asian-
American, and Latino models in
their “quarterly magazines and
similar materials, shopping bags,
store posters and video, website,
A&F TV, and purchased
advertising.” The purpose of this
marketing shift is to encourage
minorities to apply for
employment with Abercrombie.
Product, Company Annual Report
Description
Outcome
Zyprexa, Eli Lilly
2005 Annual Report
Product liability
In 2005, two lawsuits were filed in
the Eastern District of New York
purporting to be nationwide class
actions on behalf of all consumers
and third party payors, excluding
governmental entities, which have
made or will make payments on
account of their members or in-
sured patients being prescribed
Zyprexa.
In 2009, the New York Times
reported “Eli Lilly agreed
yesterday to pay up to $500
million to settle 18,000 lawsuits
from people who claimed they
had developed diabetes or other
diseases after taking Zyprexa,
Lilly’s drug for schizophrenia and
bipolar disorder.
Including earlier settlements over
Zyprexa, Eli Lilly has now agreed
to pay at least $1.2 billion to
28,500 people who said they
were injured by the drug. At least
1,200 suits are still pending, the
company said. About 20 million
people worldwide have taken
Page 43
Zyprexa since its introduction in
1996.
The settlement covers cases filed
in state and federal courts by law
firms or groups of firms for 18,000
clients, Lilly said. The federal
suits have been overseen in
Brooklyn by Judge Jack B.
Weinstein of the Eastern District
of New York.”
New York Times, November 7,
2009
Product, Company Annual Report
Description
Outcome
iPhone, Apple, Inc.
2007 SEC Form 10-K
New product
In January 2007, the Company
announced iPhone, a handheld
device that combines in a single
product a mobile phone, a
widescreen iPod with touch
controls, and an Internet
communications device. The
iPhone user interface is based on
the Multi-Touch display allowing
users to control the device with a
touchscreen.
iPhone lets users make calls by
tapping on a name or number in
their address book, a favorites
list, or a call log as well as select
and listen to voicemail messages
in any order.
In the worst recession since 1930,
the 2009 Form 10-K, reported
iPhone unit sales of 20 million
and iPhone revenues of $6.7
billion.
In only 2 years the iPhone
transformed the marketplace for
wireless communication and
computing. Apple stopped
thinking of the iPhone as only a
phone. It presented it as a very
small but powerful computer
carried in your pocket. Unlike a
phone with fixed features it is a
computer with highly useful
capabilities. The iPhone has
access to the Internet, can play
music, respond to voice
commands, has GPS direction
finding and is also a telephone.
Like a PC, the iPhone is highly
flexible, its function limited only by
the tens of thousands of
inexpensive 3rd party applications
the use can easily download.
Product, Company Annual Report
Description
Outcome
Walmart
2015 Annual Report
Wage-and-Hour Class Action:
Braun/Hummel v. Walmart , Ct. of
Common Pleas, Philadelphia
County, PA, 3/20/02 and 8/30/04;
After years of employee protests and
outrage over meager pay, on
February 19, 2015, Walmart said it
will spend $2.7 Billion, over two
Page 44
Failing to Pay Employees for
all hours worked.
Superior Ct. of PA, Eastern Dist.,
Philadelphia, PA, 12/7/07;
Supreme Ct. of PA, Harrisburg,
PA, 10/9/11; US Supreme Court,
Washington, D.C., 3/13/15.
Wage-and-Hour Class Action:
The Company is a defendant in
Braun/Hummel v. Walmart Stores,
Inc., a class-action lawsuit
commenced in March 2002 in the
Court of Common Pleas in
Philadelphia, Pennsylvania. The
plaintiffs allege that the Company
failed to pay class members for all
hours worked and prevented
class members from taking their
full meal and rest breaks. On
October 13, 2006, a jury awarded
back-pay damages to the plaintiffs
of approximately $78 million on
their claims for off-the-clock work
and missed rest breaks. The jury
found in favor of the Company on
the plaintiffs’ meal-period claims.
On November 14, 2007, the trial
judge entered a final judgment in
the approximate amount of $188
million, which included the jury’s
back-pay award plus statutory
penalties, prejudgment interest
and attorneys’ fees. By operation
of law, post-judgment interest
accrues on the judgment amount
at the rate of six percent per
annum from the date of entry of
the judgment, which was
November 14, 2007, until the
judgment is paid, unless the
judgment is set aside on appeal.
On December 7, 2007, the
Company filed its Notice of
Appeal. On June 10, 2011, the
Pennsylvania Superior Court of
Appeals issued an opinion
upholding the trial court’s
certification of the class, the jury’s
back pay award, and the awards
of statutory penalties and
prejudgment interest, but
reversing the award of attorneys’
fees. On September 9, 2011 , the
Company filed a Petition for
Allowance of Appeal with the
Pennsylvania Supreme Court. On
July 2, 2012 , the Pennsylvania
Supreme Court granted the
Company’s Petition. On
December 15, 2014, the
Pennsylvania Supreme Court
issued its opinion affirming the
Superior Court of Appeals’
years, to give raises to half-a-million
workers.
About 500,000 full- and part-time
associates at both Walmart and the
company’s Sam’s Club warehouse
stores will start making $9 an hour or
more in April 2015. The world’s
largest retailer made the
announcement Thursday as part of
its fourth-quarter earnings report.
That’s at least $1.75 more than the
federal minimum hourly wage of
$7.25. By February 2016, hourly
employees will make at least $10 an
hour after completing about six
months of training.
Full-time employees currently make
an average of $12.85 an hour, and
part-time employees make an
average of $9.48, Lundberg says.
Those averages will increase to $13
and $10 respectively under the new
plan.
The announcement comes as
Walmart has experienced declining
store traffic for months and has lost
some of its edge. Walmart has been
called out over the years by
employees and advocacy groups for
not paying employees enough to live
on and employees having to seek
welfare assistance. Protesters most
recently flanked stores during the
holiday season, particularly around
Thanksgiving and Black Friday, to
push for higher wages.
The move could ultimately lead to
higher foot traffic and sales at
Walmart, which hasn’t been able to
sustain significant sales momentum
since the 2008 recession.
Page 45
decision. At that time, the
Company recorded expenses of
$249 million for the judgment
amount and post-judgment
interest incurred to date. The
Company will continue to accrue
for the post-judgment interest until
final resolution. However, the
Company continues to believe it
has substantial factual and legal
defenses to the claims at issue,
and, on March 13, 2015, the
Company filed a petition for writ of
certiorari with the U.S. Supreme
Court. On April 20, 2015, the
plaintiffs filed their response in
opposition and on May 4, 2015,
the Company filed its reply brief.
Question
2.3 – Challenges and Success for Your Company
Review the Annual Report for Shareholders and the Form 10-K for your company. Using the
above list of Marketplace Issues, identify the marketplace issues affecting your company. Your
company is large enough to be newsworthy. Most likely, the issue you identified in the Annual
Report for Shareholders or the Form 10-K might be reported elsewhere. With research apart
from the Annual Report for Shareholders and the Form 10-K you may be able to find additional
information about the issue. There are several print media research sources available in the
library and online where you may find useful information:
1. Wall Street Journal
2. New York Times
3. Barron’s
4. Moody’s Complete Corporate Index
5. Standard and Poor’s Industry Guide
The Internet makes a vast universe of material available to you. It is fast and convenient. The
chances are remote that you will not be able to discover sufficient information to satisfy your
needs. Use your favorite search tool and start digging.
Your company is a good place to start. Their website may have relevant press releases about the
issue. Some of the officers may have made speeches or written articles about it. Significant
marketplace issues are generally identified in the Annual Report for Shareholders and the Form
10-K for your company. They are also discussed during annual and quarterly shareholder
meetings. Many companies make the recorded proceeds of the meetings available on their
website. Another place where marketplace issues are discussed is during company presentations
to financial analysts. Often the presentations are recorded and are available on the company’s
website.
http://online.wsj.com/home-page
http://www.nytimes.com/
http://online.barrons.com/home-page
http://www.moodys.com/
http://www.standardandpoors.com/home/en/us
Page 46
Describe the significant marketplace issues identified in the Annual Report for Shareholders and
the Form 10-K for your company. For each issue:
1. Include the marketplace category.
2. The description of the issue as it appeared in the Annual Report for Shareholders and the
Form 10-K for your company.
3. Your interpretation of its significance to the company, what the importance is to the
company and if management is capable of creating a positive outcome.
Video 22 Steve Jobs presents first iPhone in 2007
Chapter 2: Self-Assessment
Use this self-assessment module to help you know where you are in learning the contents for
Chapter 2. You’ll get a better understanding where you are and what you need to do to cross the
finish line.
2.3 – Challenges and Success for Your Company
Marketplace Issue Description of the Issue Significance
Five Ws and One H Form 10-K MD&A Item Outside Source
What is it? 20mg omeprazole delayed-
release tablets.
sales are anticipated to be
in the range of
$150,000,000 to
$200,000,000
Omeprazole decreases the
amount of acid produced in
the stomach. Omeprazole
is used to treat symptoms
of gastroesophageal reflux
disease (GERD) and other
conditions caused by
excess stomach acid.
Omeprazole is also used to
promote healing of erosive
esophagitis (damage to
your esophagus caused by
stomach acid).
(www.drugs.com)
Omeprazole has an
estimated market size of
over $3.6 billion in the US
and $6 billion worldwide.
(The Hindu Online, India’s National
Newspaper, Saturday, October 06,
2001)
The OTC market for
Omeprazole accounts for
the remaining 13% or $2.4
billion in 2009. (“U.S. Market for
Gastrointestinal Pharmaceuticals”,
Business Communications Company,
September 2005.)
“The omeprazole has been
a great success for us,”
said Papa. Perrigo does not
reveal specific financial
numbers related to its sales
of omeprazole, but Papa
noted that they had
predicted it would represent
up to $200 million in annual
sales. (By Pete Daly, Health
Quarterly, Published: October 5,
2009)
When did it occur? third quarter of fiscal 2008
Where did the
action take place?
in the store brand OTC
market in the United States
CVS, Walgreen, Walmart,
Kroger (Perrigo Presentation to
Bank of America Merrill Lynch Global
Healthcare Conference, London,
September 15, 2009)
Page 50
Who was involved? Dexcel Pharma
Technologies, Ltd.
Leiner Health Products
LLC, biggest competitor, a
company struggling with
quality issues filed for
Chapter 11 reorganization
in March 2008 in U.S.
bankruptcy court. (Kalamazoo
News, May 17, 2008)
Why did this
happen?
(FDA) granted final
approval to Dexcel Pharma
Technologies, Ltd. (Dexcel)
for 20mg omeprazole
delayed-release tablets.
Omeprazole, Dexcel
Pharma added to FDA
Approved OTC Drug List.
(FDA December 2007: Additions and
Deletions to the Drug Product List
27th Edition: Cumulative Supplement
Number 12, 4/30/2008 Update.)
How did it happen? A partnership with Dexcel,
the Company is the
exclusive marketer and
distributor of this product
for the store brand OTC
market in the United States
“Perrigo said Wednesday it
has signed a deal with
Dexcel Pharma for over-
the-counter marketing of
Dexcel’s generic Prilosec
OTC.” (UPI, June 7, 2006)
Question 3.1 – What is Management saying about your company?
When the Management’s Discussion and Analysis of Operations and Financial Condition
(MD&A) asking each of the following questions will help to identify a significant fact that will
help you understand your annual report. Pick an item reported in the MD&A which you believe
to be significant and ask:
• What is it?
• When did it occur?
• Where did the action take place?
• Who was involved?
• Why did this happen?
• How did it happen
Page 51
Answer as much of the five Ws and one H as you can from the annual report. Next, use the
internet and other printed media sources to get additional information about the item. From the
combined sources you should be able gather a reasonably complete assessment of the item.
Use the following template to complete your answers.
3.1 – What is Management saying about your company?
Copy the item from the MD&A and paste it below. Highlight the Five Ws and One H in the body of the item.
Five Ws and One H Form 10-K MD&A Item Outside Source Material
Paste the answer from the MD&A item for each of the following questions.
A What is it?
B When did it occur?
C Where did the action take place?
D Who was involved?
E Why did this happen?
F How did it happen?
G What do you believe is the
importance of this item to your
company?
Analyzing the Message to Shareholders
Why is it Important
Each year the Chairman or President writes a message to the shareholders. The message is
usually included in the Annual Report to Shareholders. Some companies will publish the
Chairman or President’s message the company’s annual proxy statement to the shareholders.
Proxy statements can be found on the Investor Relations page of the company’s website. They
are also filed with the Securities and Exchange Commission and can be found on the SEC
EDGAR website.
Why is the Chairman’s message important? How significant can it be? There are several
interesting similarities between the Chairman of a corporation and an elected public official. The
similarities between the two become more striking in larger corporations. Fortune 500
companies create a large economic footprint. Many of them have annual revenue larger than the
gross national product of many countries. Some have employees larger than the entire workforce
of smaller countries. Some have more international locations than countries have embassy
locations. Some have millions of shareholders.
The following table compares countries with Fortune 500 companies. The country data came
from U. S. State Department 2009 background sheets and the International Monetary Fund. The
company data came from the 2008 SEC Form 10-K for each company.
Argentina, Brazil, Canada, China, the Dominican
Republic, Hong Kong, India, Italy, Japan,
Mexico, the Netherlands, Peru, the Philippines,
Russia, South Korea, Spain, Sri Lanka, Taiwan,
the United Arab Emirates, the United Kingdom
and Venezuela.
Iceland 3M Company
GNP 12 Billion Revenue 24 Billion
Work
force
178,000 Employees 79,183
IMF
Rank
98 Fortune 500
Rank
100
President Olafur Ragnar
Grimsson
Chairman George W.
Buckley
International:
Argentina, Australia, Austria, Belgium, Brazil,
Canada, Chile, China, Colombia, Costa Rica,
Czech Republic, Denmark, Dominican Republic,
Ecuador, Egypt, El Salvador, Finland, France,
Germany, Greece, Guatemala, Hong Kong,
Hungary, India, Indonesia, Ireland, Israel, Italy,
Jamaica, Japan, Kenya, Korea, Malaysia,
Mexico, Morocco, Netherlands, New Zealand,
Norway, Pakistan, Panama, Peru, Philippines,
Poland, Portugal, Puerto Rico, Romania, Russia,
Singapore, South Africa, Spain, Sri Lanka,
http://www.3m.com/
http://www.presidencia.gob.pa/
http://www.iceland.is/
http://www.tyson.com/
Page 54
Sweden, Switzerland, Taiwan, Thailand, Trinidad
& Tobago, Turkey, Ukraine, United Arab
Emirates, United Kingdom, Uruguay, Venezuela,
Vietnam (3m.com)
What to expect
The Chairman’s Message is a skillfully written statement. Often, professional writers are used.
Attorneys, accountants, management and consultants will assist the Chairman in preparing the
message. Preparing the Message is a lengthy and significant process. For many companies it
may take many weeks. The primary purpose of the Message is to provide the shareholders with
a brief overview of the previous year and insight into the Chairman’s plans for the coming year.
It is, however, a very public message and is also read by many people who are not shareholders.
These are some of the constituents of a public company that may read the Chairman’s message.
Institutional
investors
Regulatory agencies Competitors
Financial
analysts
Local and state
governments
Suppliers
Bankers Foreign governments Vendors
Creditors Environmental activists Distributors
Employees Consumer advocates Customers
Salespeople
Human rights
advocates
Press and
media
Franchisees
Regulatory agencies
Unions
What happened last year
A major portion of the Message will deal with the events of the previous year. A well prepared
Message will include both positive and negative developments. In reporting negative
developments, strong and responsible management will often admit they failed to see an
unfavorable trend or circumstance. Negative issues are often referenced by positively describing
the new policy or action to resolve issue. Information about new products, acquisitions and
expansion may also be mentioned in the Chairman’s message. The Message will attempt to
describe the current state of the company in the context of significant events and also in the
context of the company’s performance over previous years.
Page 55
Occidental Petroleum Corporation
Chairman’s Message, 2008 Annual Report to
Shareholders.
The Message The Issue
“Our successful initiatives in Columbia, including community
education programs, environmental stewardship and
commitment to human rights, are a case in point, OXY was
one of 11 finalists – out of more than 60 companies
nominated by U.S. ambassadors around the world – for the
U.S. Secretary of State’s prestigious 2008 Award for
Corporate Excellence. This nomination recognized OXY’s
achievements in building trust, understanding and a
sustainable partnership with local stakeholders.”
Members of Peru’s Achuar indigenous community filed a
lawsuit against Occidental Petroleum alleging the company
contaminated soil and rivers in the area for more than 30
years.
Tomas Maynas Carijano, et al vs. Occidental Petroleum
Corporation
Case Number: 2:2007cv05068
Filed: August 3, 2007, California Central Federal District
Court
Press Release from Amazon Watch and carried by major
newswires.
(WORLD-WIRE) LOS ANGELES, May 1,
2009 /PRNewswire-US Newswire/;( REUTERS) “ Today, a
delegation of concerned shareholders, environmental and
human rights activists, lawyers and celebrities will once
again address Occidental Petroleum’s (OXY) annual
shareholders’ meeting to urge CEO Ray Irani and the Board
of Directors to rectify the company’s legacy of harm in the
Peruvian Amazon before more indigenous Achuar people fall
victim to widespread oil contamination.
Among advocates and proxy-holders who will speak at the
meeting at the Fairmont Hotel in Santa Monica will be Lily la
Torre, lawyer for the Achuar people in Peru; Bill Powers,
engineer with E-tech International; Patrick Doherty, Director
of Corporate Responsibility for New York City Common
Retirement Fund and actress Q’orianka Kilcher (The New
World).
For every barrel of oil produced in Peru, OXY dumped eight
barrels of toxic wastewater into the Amazon. Over three
decades, the company discharged an estimated nine billion
barrels of toxic effluent directly into rivers and streams used
by the Achuar for drinking, bathing and food production.”
Occidental Petroleum Corporation
OXY is heavily engaged in developing oil reserves in Peru. Human rights activists claim OXY
oil development methods are destroying the habitat and killing the indigenous Achuar
population. The company had a similar previous experience in Columbia that proved costly and
resulted in negative press for the company. Dr. Ray Inari, Chairman, Occidental Petroleum,
appears to be concerned about the possible negative impact human rights activists may create
about the company’s operations in Peru. Writing about the 2008 Award may be an attempt to
neutralize those concerns.
FedEx Corporation
Chairman’s Message, 2008 Annual Report to
Shareholders.
The Message The Issue
“Despite the strong economic headwinds, we are building on
our strengths to produce outstanding results when the
recovery occurs. We’ve built shock absorbers into our
networks — that is, the ability to flex up or down as economic
conditions and volumes shift. It gives us the resiliency to
power through hard times like the present.”
FedEx owns 654 aircraft and 43,000 vehicles. It has
140,000 employees. Salaries and fuel represent almost 50%
of the company’s operating expense. The FedEx model
relies on a large fixed overhead facility. The company’s
profitability is built on increasing shipment volume through a
fixed overhead delivery system. Historically, two things have
threatened profitability; a weak economy and higher fuel
costs. The company has always been a bellwether for the
economy. It loses shipments as the economy slows and
increases shipments as the economy expands. The 2008
recession and skyrocketing fuel prices wreak havoc with
FedEx profits. The profit picture for FedEx looks bleak with
the projections for the economy to remain sluggish through
2010 and fuel prices remaining above their 2007 levels for
the foreseeable future.
In 2004, FedEx reduced its workforce by 12% to bring
operating expenses in line with revenues. At that time the
company was delivering approximately 24 packages a day
per employee. In 2009, the company was delivering almost
the same number of packages a day per employee.
FedEx Corporation
Since its inception, FedEx has worked to build employee loyalty. The company has made every
effort to avoid layoffs. In 2004, the company reduced its workforce for the first time in its
history. Package delivery is a labor intensive service. The quality of service is dependent on the
commitment of the workforce to deliver packages on time. FedEx is going through a very
difficult time. Its current performance appears similar to its performance in 2004. It appears
Fred Smith, Chairman, Federal Express Corporation, may be attempting to reassure employees
there will be no layoffs. His statement about building “shock absorbers” into the system might
suggest to employees the company is able to survive through a sluggish economy without a
“At Intel, we also tackle significant societal challenges,
setting transparent and ambitious goals to address corporate
responsibility issues. In 2015, we launched our Diversity and
Inclusion initiative, setting a bold hiring and retention goal to
achieve full1 representation of women and underrepresented
minorities in Intel’s U.S. workforce by 2020. I’m also
incredibly proud that a thorough compensation analysis
showed we’re at 100% gender pay parity for U.S. employees
across job types and levels.2 In addition, we continued our
efforts to establish a conflict-free supply chain for Intel
products. Maintaining accountability in the supply chain will
be an ongoing process for Intel.
An illegal plot among Silicon Valley companies, including
Apple, Google, Intel, and Adobe to suppress engineers’
wages produced a drawn-out court fight over how much the
employees should get in compensation. Also, how much the
lawyers representing them should be able to collect from that
amount.
On August 29, 2015, U.S. District Judge Lucy Koh approved
a settlement in which Apple, Google, Intel, and Adobe will
pay $415 million for their role in the plot, which involved
senior executives like the late Steve Jobs creating “no-
poach” lists. The lists were part of a scheme whereby
companies agreed not to recruit employees from each other.
While disclosing the illegal anti-poaching plot and settlement,
CEO, Brian M. Krzanich, attempts to deflect and mitigate the
impact by mentioning two other positive initiatives: the
Diversity and Inclusion Initiative and the Conflict-Free supply
chain initiative.
Intel Corporation
Unlike most states, California does prohibits including “non-compete” clauses in employment
agreements. It is even illegal for an employer to deny someone employment for refusing to sign
an employment agreement with non-compete clause. The absence of a non-compete clause
makes it easier for high technology talent to move from company to company. In this kind of
employment environment, companies, like Intel, find their intellectual property and trade secrets
vulnerable to competitors poaching employees. Technology companies, in California, have been
waging a high-stakes war for recruit and retain top engineers. To ward off employee raids and
protect their intellectual property, Intel and other companies resorted to other tactics, like a ‘no-
poach list’.
Events that could have a negative impact on the company may be more difficult to identify in the
Chairman’s Message. One way to disclose a negative event is by describing it in terms of a
positive outcome associated with the event. Describing plans to avoid a negative issue is another
approach to handling negative issues. The Chairman may attempt to neutralize a negative issue
sharing a positive offset. Identifying the negative issues in the Message requires a reverse
interpretation of events and issues described in the Message. Examining the negative reflection
of an event or issue will often lead to uncovering the possible negative impact on the company.
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What’s the Plan
It is the Chairman’s job to create and maintain the confidence of the company’s broad
constituency in the company. A significant objective of the Chairman’s Message is to create and
maintain confidence in the company. Each year, the company works to reaffirm the attraction
and commitment its constituency has for it.
Generally, the Message will attempt to create a shared vision of the company with the reader.
When successful, the shared vision of the company may inspire the reader to support
Management and the Company for another year. Often, people may get energized by what their
company is working to accomplish. Ideally, the Message will instill confidence in the reader for
the company as a good investment. To accomplish this, the Chairman’s Message may include
some of the following:
• Guidelines and goals for future decisions.
• Proactive initiatives to resolve anticipated contingencies.
• Specific means of measuring success.
• Assurance of adequate resources to implement plans.
• What worked last year, where the gaps were and the prospects for the next year?
At its best, the Chairman’s Message will present a roadmap for the reader showing how the
company will be able to meet expectations for profitability and success.
Question 3.2 – What did the Chairman say?
Read the Chairman’s Message in the Annual Report to Shareholders for your company. Identify
the issues and events outlined in the Message. Highlighting the text of the issues and events can
help assess their significance and prioritize them.
3.2.1 – What did the Chairman say?
A In your opinion, what is the most significant issue in the
Message?
B What language did the Chairman use in the Message
to describe the issue?
C What is the significance of the issue for the company?
D Did the Message include a solution for the issue?
E Did the solution instill confidence in you?
F If yes, why? If no, why?
The Chairman’s Message is read by a wide and diverse constituency. Select a group of
constituents excluding shareholders, investors and financial analyst. Write your opinion of how
you believe they will react to the Chairman’s message. Select one from the following
constituents.
Creditors Regulatory agencies Competitors
Employees Local and state Suppliers
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governments
Salespeople Foreign governments Vendors
Franchisees Environmental activists Distributors
Unions Consumer advocates Customers
Human rights
advocates
Press and
media
Regulatory agencies
3.2.2 – What did the Chairman say?
A Constituency name
B With respect to the company, is the constituency
supportive, neutral or adversarial?
C What issue in the Chairman’s message will cause the
greatest reaction?
D How do you believe the constituency will react to the
issue?
E Why do you believe they will react that way?
F Will their reaction create a positive or negative impact
on the Company? What will be the impact and why?
Video 23 Walmart early years.
Corporate Transparency
Many investors rely on a company’s financial statements when making a decision to make an
initial investment in a company or to continue maintaining an investment in a company. Other
constituents of the company also rely on the company’s financial statements when deciding how
to interact with the company. Enron and WorldComm are examples of financial devastation
across a broad spectrum of company constituencies resulting from reliance on faulty company
financial statements.
Video 24 Enron CEO arrested for fraud
Video 25 Inside the WorldCom scam
SOX
Responding to these and other highly publicized business
failures, allegations of corporate improprieties and
financial statement restatements, Congress enacted the
Sarbanes-Oxley Act of 2002. Commonly called, SOX,
the act was intended to restore public confidence to the
capital markets by altering the behavior of public
companies. SOX also raised the regulatory bar higher for
the accounting profession, especially for accountants doing audits of public companies. It
created the Public Company Accounting Oversight Board (PCAOB) to oversee accountants
auditing public companies. In addition, SOX also imposed high ethical standards, including
prohibiting conflicts of interest and even potential conflicts of interest between auditors and their
clients. Civil and criminal penalties for violations were increased. The net effect was to
substantially increase the legal liability of accountants and management.
SOX requires management to acknowledge its responsibility for establishing and maintaining
adequate internal controls. It also required management to assert, in writing, their effectiveness
in maintaining the controls. An independent financial auditor, in turn, must report on
management’s assertion about the effectiveness of its internal controls.
Video 26 Senator Paul Sarbanes discusses the Sarbanes-Oxley Act.
The Role of the Independent Auditor
SOX also altered the role of the auditor. The auditor must attest to management’s assessment of
the effectiveness of its controls using standards set by the Public Company Accounting
Oversight Board. To meet these requirements management must
• Accept responsibility for the effectiveness of its internal controls.
• Evaluate their effectiveness using suitable control criteria.
• Support this evaluation with sufficient evidence.
• Present a written assertion about their effectiveness in either a separate report
accompanying the auditor’s report or a representation letter to the auditor.
The auditor, as required by SOX, must have management identify, document and evaluate the
significant internal controls. Management cannot delegate these functions to the auditors, nor
can it rely on the auditor’s testing to support its assertion. The guidelines for management
controls provided by the American Institute of Certified Public Accountants include:
• Controls over initiating, recording, processing and reporting significant account balances,
classes of transactions and disclosures and related assertions embodied in financial
statements,
• Antifraud programs and controls.
• Controls, including general ones, on which other significant controls depend.
• Each control in a group that functions with another one to achieve a control objective.
• Controls over significant non-routine and nonsystematic transactions.
• Controls over the period-end financial reporting process
Video 27 Auditors’ Report
Question
3.3 – Internal Controls and Auditors
Information about the company’s compliance with SOX can be found in the SEC Form 10-K.
The section called Controls and Procedures includes information about how the company is
http://pcaobus.org/Pages/default.aspx
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complying with the SOX reporting requirements. Generally preceding the section on Controls
and Procedures is the Report of Independent Registered Public Accounting Firm. It will also
contain information about internal controls and auditors. Review these sections of your
company’s SEC Form 10-K and answer the following questions.
3.3 – Internal Controls and Auditors
A Who in your company is responsible for the internal
disclosure controls and procedures?
B Who are members of the Audit Committee?
C What is the name of the independent auditor for your
company?
D What was the auditor’s opinion of the consolidated
financial statement?
E What was the auditor’s opinion of the internal
disclosure controls and procedures?
Chapter 3: Self-Assessment
Use this self-assessment module to help you know where you are in learning the contents for
Chapter 3. You’ll get a better understanding where you are and what you need to do to cross the
How much is the company worth? Is it making money? Is it growing? Is it doing well? Will it
keep growing? How do they get their money? First time investors and seasoned pros ask the
same questions. The questions are good ones because the answers are fundamental to sound
investment decision making. Often, the answers are in the numbers and the numbers are in the
financial reports all public companies publish. The four major financial reports are:
• Balance Sheet: The balance sheet can help you get a greater sense of what the
company owns and what it owes. It can also give you an indication of the resources a
company has to help it grow during economic booms and to survive during bad times.
• Statement of Cash Flows: The true value for many companies can be based on the
cash flow. The Cash Flow Statement lets you understand how much cash came into
the company, where it came from, how much was used and how it was used.
• Income Statement: The income statement shows the income and the expenses for a
specific period of time. It will also show the profit or loss during for that period.
• Statement of Shareholders Equity: This report tells a shareholder the value of the
stock. It is not the price of the shares as traded on public exchange. Rather, it
includes capital stock, paid-in capital, retained earnings, treasury stock, unrealized
loss on long-term investments, and foreign currency translation gains and losses.
The last of the reports is the Notes to the Financial Statement. While not considered a primary
report, it generally contains valuable information. Often additional information is required about
an entry in the reports. The additional information may be necessary for clarity, amplification or
regulatory compliance. The Notes to the Financial Statement contains more complete and
valuable information about some entries.
The Balance Sheet
A balance sheet is a snapshot of a company’s financial condition at a specific point in time. The
balance sheet of an SEC Form 10-K must reflect the financial condition of the company at the
end of its fiscal year. A balance sheet will include the company’s
• Assets,
CHAPTER
4
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• Liabilities,
• Shareholders Equity.
At any given time, assets must equal liabilities plus shareholders equity. An asset is anything the
business owns with a monetary value. Liabilities are claims of creditors against the assets of the
business.
Fiscal Year
The fiscal year for a company is the 12 months from the start of business to the end of business.
While many companies end their fiscal year with the calendar year, many do not. The fiscal year
for many companies is different from the calendar year. The nature of a company’s needs will
often determine the start of the fiscal year.
Company Fiscal Year Ending Date
The Home Depot, Inc. February 3
H. J. Heinz Company April 29
FedEx Corporation May 31
CACI International Inc June 30
Johnson Controls, Inc. September 30
Rockwell Collins, Inc September 30
Some retailers, like Home Depot, choose to close their books after the end of January due to the
large amount of December sales. Having the fiscal year-end close to a heavy selling season
places a heavy burden on the company. It is hard to imagine Home Depot closing stores during
Christmas so employees could spend their time counting inventory.
Companies doing a lot of work with the U.S. Government might choose a September 30 year end
to coincide with the Federal Government fiscal year end. Johnson Controls and Rockwell
Collins both have their fiscal year ending the same as the Federal Government. Both companies
are large government contractors.
Question 4.0 – What is your company’s fiscal year
4.0 – What is your company’s fiscal year?
A When does your company’s fiscal year end?
B In your opinion, why did your company select this date
to end its fiscal year?
C Do competitors use the same fiscal year as your
company?
The section also has a structure used by most companies. The structure allows for easier
comparison of performance between companies. It also makes it easier for shareholders and
others to more easily read and understand the company’s performance. There are several
categories in this section for reporting revenues, cost of goods sold and operating expense.
Net Sales
This income statement category is often called the “top line”. When other lines above the “top
line” they generally provide sales details for major revenue producing core business segments.
Net Sales represents the total dollar volume a company receives from the sale of its products or
services less the following items:
• Cash or other discounts
• Returns of products by customers
• Freight and other cost of goods returned.
• Damaged, missing or stolen products.
Cost of Goods Sold
Cost of sales and “COGS” are other names for the Cost of Goods Sold category of the income
statement. Included in this category are the direct costs attributable to the production of the
goods or services sold by the company. The items contributing to the direct cost of producing
the product or service are listed individually. Some may report the
following items in this category:
• Labor
• Overhead
• Raw materials: The total cost of raw materials, during
the accounting period, is equal to the beginning
inventory plus the cost of materials purchased, minus the
ending inventory.
Companies providing a service may also report cost of goods sold. It may, however, appear
different from a manufacturing company. For a telecommunications company, cost of goods
sold might be the interconnection cost with other communication carriers or network capacity
leased from another carrier.
Gross Profit
Gross profit for a company is the difference between the cost of goods sold and the net sales (Net
sales – Cost of goods sold = Gross profit). It is the money a company would make if it didn’t
pay any other expenses such as salary, income taxes, office supplies, electricity, water, rent and
other overhead items. The gross profit is a good indicator of how well the company might fair if
it had to compete on price to maintain or capture market share. For example, a company sells a
product for $200, the cost of goods sold is $125 and its gross profit is $75. If the company
wanted to drop the price 10%, 20% or 30% how long could it maintain the price reduction and
survive.
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Operating Expense
This income statement account generally includes two major categories. The first is General
Administrative Expense. The other category is Depreciation. Both are generally posted as a
separate line item on the Income Statement.
General Administrative Expense
Items in this category include operating expenses for the company not directly linked to the
company’s products or services. These items include:
• Rent
• Salaries and human resources
• Communication costs
• Utilities
• Office supplies
• Accounting and legal fees
• Travel
General sales and marketing expense may also be included in this category. Other companies
may report general sales and marketing expense as separate category.
Operating Income
Operating income calculates the difference between the Gross Profit and the Operating Expense.
This calculation shows the profit realized from the company’s primary business operation. It is
frequently referred to as the earnings before interest and taxes or “EBIT”. For many investors,
this calculation is an important meter of the company’s overall health and an indicator of the
company’s earnings potential. Non-operating items are not included in the operating income
calculation. Unusual nonrecurring items, such as gains from selling a subsidiary or losses from
closing a plant, are also not included in the calculation.
Marriott International, Inc.
2015 SEC Form 10-K Income Statement
Marriot is one of the largest owner
and operator of full-service hotels in
the United States. It operates 1,116
properties (300,305 rooms) under
long-term management agreements
with property owners; 41 properties
(9,206 rooms) under long-term
lease agreements with property
owners (management and lease
agreements together, “the
Operating Agreements”); and six
properties (1,437 rooms) that it
owns. In addition, it operates, under
long-term management
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agreements, 41 home and
condominium products (4,203 units)
for which they manage the related
owners’ associations.
Marriott
Gross Profit $14,486
Operating income $13,136
Net Income $1,255
Question
4.12 – How does your company report the core business?
Often, a company will use terms closely related to their core business when describing the line
items in the operational section of the income statement. Some standard descriptions for the line
items in the operational section of the income statement are:
• net sales
• cost of goods sold
• gross profit
• general administrative expense
• operating income
How does your company describe the items in its operating section of the income statement?
Does the company use descriptions other than net sales, cost of goods sold, gross profit, general
administrative expense and operating income? Why do you believe they use them? What does it
tell you about the core business for the company? Mark your answer “NA” if your company did
not unique operating section descriptions.
4.12 – How does your company report the core business?
Item descriptions In your opinion, why is it used?
A
B
C
D
E
F What does it tell you about the core
business for the company?
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Question
4.13 – How does your company describe its business income?
The way a company reports its income can help to better understand how the company prioritizes
its revenue streams and how it perceives its core business. Does your company report revenues
by business segment? What segments are individually identified? In your opinion, does the
most significant business appear first? What is the most significant business segment and why?
Mark your answer “NA” if your company did not report revenue by business segment.
4.13 – How does your company describe its business income?
Revenue segment descriptions Identify the most significant segment and explain why it is the most significant.
A
B
C
D
E
Non-Operating Section
This section of the income statement includes the revenues and expenses not generally part of the
core business of the company. They are posted in this section to be able to reflect the income
and expense for the company and not distort the performance of the core business. Generally,
companies will include interest income and expense in this section.
Non-operating Income
Dividend income from shares in another company, rents and patent licenses are examples of the
non-operating incomes. The profitable sale of property might also be included with non-
operating income.
Income Taxes
Most public companies operate in many states, counties and cities. Each locality has taxing
authority and companies, may be liable to local governments for an assortment of taxes.
Additionally, federal income tax must be paid by US companies. Many companies, like Tyson
and 3M, also operate internationally and are subject to an array of taxes levied by foreign
sovereign and local governments,
Some of the taxes are based on the company’s income and have periodic payment schedules.
Tax payments are reported in this account.
Interest Expense
Public companies generally have short and long term debt. The debt could be a bond, debenture,
mortgage, unsecured short term note, long term loan or other indebtedness. Most all debt
includes interest on the funds borrowed. The interest payments are usually made periodically.
Payments can be monthly, quarterly, semi-annually and annually depending on the terms of the
debt. The interest payments are usually posted to this account.
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Irregular Items
The name of this section is not a value judgment of the items posted to the section. It is,
however, an indication the items posted to the account will most likely not happen again. They
are segregated from the operating section of the Income Statement to prevent a distortion of the
performance of the central part of the company’s business. Generally, companies will include
three categories in this section. The first is discontinued operations. Extraordinary Items usually
is the second category. The last category is often changing in accounting principle.
Discontinued Operations
From time to time, a company may refocus itself and sell operating units that no longer fit with
its core business and buy other companies that do. Companies will discontinue operations for a
myriad of reasons from a need to raise cash, political motivation, eliminate an unprofitable
operation or a change in CEO. It is something most companies do, and they do it with some
frequency. The gain or loss
from the discontinued operation is posted to this account.
In most cases, to qualify as a discontinued operation, the company component must have been
sold or has been identified as being for sale. The operations and cash flows of the component
either have been or will be eliminated from the company’s ongoing operations. After the sale,
the company component will not have any significant continuing involvement in the operations
of the company.
Proctor and Gamble Company Sells Folgers
2009 SEC Form-10K Income Statement P&G sells Folgers to
Smucker’s for $2.1B
The 2009 SEC Form 10-K notes to the financial statements included the following entry:
In November 2008, the Company completed the divestiture of our Coffee business through the merger of its Folgers
coffee subsidiary into The J.M. Smucker Company (Smucker) in an all-stock reverse Morris Trust transaction (tax free
exchange). In connection with the merger, 38.7 million shares of common stock of the Company were tendered by
shareholders and exchanged for all shares of Folgers common stock, resulting in an increase of treasury stock of
$2,466. Pursuant to the merger, a Smucker subsidiary merged with and into Folgers and Folgers became a wholly
owned subsidiary of Smucker. The Company recorded an after-tax gain on the transaction of $2,011, which is included
in Net Earnings from Discontinued Operations in the Consolidated Statement of Earnings for the year ended June 30,
2009.
http://www.pg.com/en_US/investors/index.shtml
http://www.smuckers.com/faq/fc/investor/faq.aspx
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Extraordinary Items
Significant gains and losses can be classified as extraordinary on the income statement only
when they are unusual and infrequent. In 2002, the FASB introduced Statement no.145. It
considerably reduced the criteria for classifying an item as extraordinary. While the FASB
stated the effect of the September 11, 2001 terrorist attack would qualify as an extraordinary
item, it would not qualify the effect of the Katrina as an extraordinary item.
The issue for the FASB was to define what is unusual. What might be unusual for one company
may not be unusual for another company. The specific characteristics of the company, such as
the type and scope of operations, lines of business and operating policies, environment and
geographic location are used to determine if the event qualifies as extraordinary. In the context
of FASB Statement no. 145, hurricane losses do not generally meet the criteria of unusual and
infrequent. Losses from hurricanes are not unusual or infrequent for companies located in a
geographic area prone to hurricanes.
The company’s explanation and description of the extraordinary item would appear in the notes
section.
Change in Accounting Principle
Voluntary changes and changes resulting from the FASB issuing a new accounting statement are
posted to this section. Companies have often faced an issue of how to reflect changes in
accounting methods in financial statements. In 2005, the FASB issued Statement no. 154,
Accounting Changes and Error Corrections. Under Statement no. 154, companies must
retrospectively apply all voluntary changes in accounting principle to previous period financial
statements unless doing so is impracticable or FASB mandates another approach. Adjustments
to previous
periods would be made by directly adjusting retained earnings.
When management decides to make implement a change in accounting principle it must include
a description of the change in the notes section. In addition, it must also include the following
information in the note section.
• Reason for the change
• Explanation of why the newly adopted principle is preferable.
• Prior period information retrospectively adjusted
• Effect of the change on:
o Income from continuing operations
o Net income
o Related per-share amounts for the current period and any prior periods
retrospectively adjusted.
• Cumulative effect of the change on retained earnings as of the earliest period.
Question
4.14 – Irregular items. Good or Bad?
While the term “irregular” is not intended as a value judgment, these items can have a positive or
negative impact on the company. Review the income statement. Select the one irregular item on
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the income statement or in the notes section you believe is the most significant. Mark your
answer “NA” if your company did not report an irregular item.
4.14 – Irregular items. Good or Bad?
A How many irregular items were reported
individually on the income statement?
B Describe the irregular item you believe is
most significant? Use the description as it
appears on the income statement or in the
notes.
C What was the dollar value of the item?
D Was the item reported individually as a
separate line item on the income
statement or in the notes section? In your
opinion, why was it reported in the notes
or as a line item?
E Did the item have a positive, negative or
neutral impact on the company?
F In your opinion, why does the item have a
positive, negative or neutral impact on the
company?
G In your opinion, will the impact be short
term, ongoing or long term. Why?
Net Income
The income remaining after all expenses and taxes have been deducted is the net income. Many
people call it “the bottom line” because it is typically found on the last line of a company’s
income statement. Net income is also called after tax profit, net, net profit and profit. It is one of
the most frequently viewed items on a company’s financial statements.
Net income is used in calculating various profitability and stock performance measures. These
include the price-earnings ratio, return on equity, earnings per share and others. The quarterly
announcements of net income will often have a direct impact on the price of the company’s
shares.
Question 4.15 – The big questions. Are they makin’ money? Are they lookin’ good?
The answer to Benny’s question “Are they makin’ money?” cannot always be answered with a
“yes” or a “no”. Whether your company is “lookin’ good” may be difficult to answered with a
“yes” or a “no”. Understanding the income and expense trends will generally reveal enough
information to answer, “the big questions”. Review the three year period reported in your
company’s income statement. Describe the trend for each of the major accounts on your
company’s income statement. Describe the trend direction. Use phrases like up only this year
but level in previous years, consistently up, down only this year, consistently down or level for
all years. Also, in your
opinion is the trend positive, negative,
insignificant?
Your company
may have different account descriptions and additional significant accounts. Modify the
accounts to fit your company’s income statement. Enter the amounts in millions of dollars from
the SEC Form 10K, for the current year, the previous year and the next previous year.
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Question 4.15 – The big questions. Are they makin’ money? Are they lookin’ good?
Accounts Current Yr. Previous Yr. Next Previous Yr.
Trend Description
A Net Sales
B Cost of Goods Sold
C Gross Profit
D Operating Expense
E Operating Income
(loss)
F Non-operating
income (loss)
G Income Tax
H Net Income
I
J
K
L
M
Pfizer, Inc.
Account: Revenues
Revenues: Revenues flat for 3
years.
Significance:
Pfizer has been the picture of financial
health for many years. The 2008 SEC Form
10-K showed for three years Pfizer revenue
has been relatively flat with revenue
averaging $48 billion a year.
The FDA approved Lipitor on December 16,
1997. It was the best Christmas present
Pfizer shareholders got that year. As of
2009, Lipitor is one of the top selling
prescription drugs and has been a top seller
for many years. If Lipitor was a pop music
singer, it would be bigger than the Beatles.
The account with largest declining or increasing trend is not always the most significant trend on
a company’s income statement. Of the trends you identified in the previous question, which
account, in your opinion, has the most significant trend for your company? Why do you believe
it to be the most significant? Trends generally do not remain constant forever. What might
reverse the significant trend and how might the reversal affect your company?
4.16 – Which trend is important and why?
A What account has the most significant
trend for your company?
B Why do you believe it is the most
significant trend?
C What might reverse this trend and how
would the reversal impact the company?
Why were revenues flat? Perhaps the drug reached maturity and market saturation?
Perhaps the slowing economy impacted sales? Perhaps it was something else?
The price of Lipitor is approximately $2-3 per pill making it a very attractive market for
competitive pharmaceutical manufacturers. Pfizer’s patents on Lipitor were successful in
preventing competition. In 2006 the FDA cleared seven companies to begin selling generic
versions of Merck’s cholesterol drug, Zocor. It appeared Zocor might represent a reasonable
generic alternative for Lipitor. The manufactures of generic Zocor began a frontal assault on
Lipitor claiming Zocor could be just as effective as and less expensive than Lipitor. After
many years of patent protection, the competition had finally arrived at the Lipitor gates.
To further complicate the issue for Pfizer management, the patents for Lipitor will expire
between 2010 and 2011.
By 2008, AMD’s cash flow was seriously anemic. The company’s cash flow suffered
from the ATI acquisition cash drain, the drubbing from arch competitor Intel and a major
recession. The AMD statement of cash flow told a different story from the company’s
income statement.
Question 4.17 – How strong is your company’s cash position?
Enter the amounts for each cash flow account from your company’s Statement of Cash Flow.
Review the three year period reported in your company’s Statement of Cash Flow. Describe the
trend for each of the major accounts. Describe the trend direction. Use phrases like up only this
year but level in previous years, consistently up, down only this year, consistently down or level
for all years. Also, in your opinion is the trend positive, negative, insignificant? Your company
may have different account descriptions and additional significant accounts. Modify the
accounts to fit your company’s Statement of Cash Flow. Enter the amounts in millions of dollars
from the SEC Form 10K, for the current year, the previous year and the next previous year.
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Question 4.17 – How strong is your company’s cash position?
Accounts Current Yr. Previous Yr. Next
Previous
Yr.
Trend Description
A Net cash from
operating activity
B Net cash from investing
activity
C Net cash from financing
activity
D Net increase
(decrease) in cash and
cash equivalents
E Cash and cash
equivalents at
beginning of year
F Cash and cash
equivalents at end of
year
Question 4.18 – How well can your company pay its bills?
Enter the amounts, for all three periods, for the Net Cash from Operating Activity account from
your company’s Statement of Cash Flow. Enter the amounts, for all three periods, for the
Current Liabilities from your company’s Balance Sheet. For each period, calculate the
Operating Cash Flow Ratio using
the following
formula.
Net Cash from Operating Activity ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend for each of the major accounts.
Describe the trend direction. Use phrases like up only this year but level in previous years,
consistently up, down only this year, consistently down or level for all years. Also, in your
opinion is the
trend
positive,
negative,
insignificant?
Question 4.18 – How well can your company pay its bills
Accounts Current Yr. Previous Yr. Next Previous Yr. Trend Description
A Net cash from operating activity
B
Current Liabilities
C Operating Cash Flow Ratio
The operating cash flow ratio can gauge a company’s liquidity in the short term. Using cash flow
as opposed to income is sometimes a better indication of liquidity simply because, as we know,
cash is how bills are normally paid off. If the operating cash flow ratio is less than one, it means
that the company has generated less cash over the year than it needs to pay off short term
liabilities as at the year end. This may signal a need to raise money to meet liabilities.
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Question 4.19 – How leveraged is your company?
Enter the amounts, for all three periods, for the Net Cash from Operating Activity account from
your company’s Statement of Cash Flow. Enter the amounts, for all three periods, for the
Interest Expense from your company’s Income Statement. For each period, calculate the Cash
Interest Coverage Ratio using the
following formula.
Net Cash from Operating Activity ÷ Income Expense
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend for each of the major accounts.
Describe the trend direction. Use phrases like up only this year but level in previous years,
consistently up, down only this year, consistently down or level for all years. Also, in your
opinion is the trend positive,
negative, insignificant?
Question 4.19 – How leveraged is your company?
Accounts Current Yr. Previous Yr. Next Previous Yr. Trend Description
A Net cash from
operating activity
B Interest Expense
C Cash Interest
Coverage Ratio
The Cash Interest Coverage Ratio is an indicator of how well your company will be able to make
the interest payments on its entire debt load. A highly leveraged company will have a low ratio,
and a company with a strong financial position will have a high ratio. Any company with a cash
interest ratio less than 1.0 is in risk of potential default. The company must raise cash outside its
core business to make its current interest payments. A ratio of 1.5 is generally considered the
bare minimum level of comfort for any company in any industry.
Interest coverage is the equivalent of a person taking the combined interest expense from their
mortgage, credit cards, automobile loans and education loans and calculating the number of
times they can pay it with their annual pre-tax income. For bondholders, the Cash Interest
Coverage Ratio might act as a safety gauge. It might give the bondholder a sense of how far a
company’s earnings can fall before the company will start defaulting on its bond payments. For
shareholders, the Cash Interest Coverage Ratio is important because it gives a clear picture of the
short-term financial health of a business.
Video 34 Overview of the Cash Flows Statement
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Statement of Shareholders’ Equity
Shareholders’ equity is the balance of the company’s assets less the liabilities. The shareholders’
equity account can be found on the balance sheet after the liabilities section.
Companies are usually expected to grow and continue to create
profits in the future. Most public companies end up being worth
far more in the marketplace than the shareholders’ equity
reported on their financial statements. For this reason,
shareholders’ equity is not a reliable measure of the market
value for a company.
As a company grows and gets older the reporting of
shareholders’ equity becomes more complex. Often, a separate
section is required to adequately disclose the details of
shareholders’ equity. This report is called the Statement of
Shareholders’ Equity. The format may differ between companies but the reporting for most
companies generally includes some common features. Companies usually report three years
activity on their Statement of Shareholders’ Equity. A three year perspective is more useful than
a one year snapshot.
Video 35 Shareholders’ Equity
Structure for the Statement of Shareholders’ Equity
Most companies will structure their Statement of Shareholders’ Equity into several sections. The
sections might include:
• Capital Stock
• Capital in Excess of Par Value
• Retained Earnings
•
Accumulated Other Comprehensive Income (Loss)
• Treasury Stock
• Shareholders’ Equity
Capital Stock
The shares of stock a company may issue to raise money are called capital stock. The
company’s charter authorizes the number and type of shares the company may issue. Capital
stock is generally divided into “classes”. The two most common classes of capital stock are
common stock and preferred stock.
Video 36 Types of company shares
Capital in Excess of Par Value
The capital invested by shareholders through purchase of stock directly from the corporation and
not through purchase of stock on the open market from other shareholders. It is the money a
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company gets from an investor in addition to the stated or par value of the stock. Capital in
Excess of Par Value is also
called “paid in capital” or “paid in capital in excess of par value”.
“Par value” is a dollar value assigned to shares of stock in the company’s charter. It is the
minimum amount for which each share may be issued. There is no minimum or maximum value
that must be assigned to the par value. Occasionally, stock will be assigned “no par value”. This
means the Board of Directors will assign a value to the stock below which the shares cannot be
issued.
Retained Earnings
Retained earnings are the amount of earnings management
reinvests in the company. Generally, a company has one of two
choices when it produces a profit. Management can decide to
either pay the earnings to shareholders as a dividend or retain the
earnings and reinvest them in the business. Both choices will be
disclosed in the Statement of Shareholders’ Equity. It allows
shareholders to see how much dividend income they received and
also how much of the earnings management has reinvested in the
company.
Accumulated Other Comprehensive Income (Loss)
This account
includes the company’s income not reported as part of net income on the company’s
income statement and may also include unrealized gains and losses on certain investments. They
are disclosed as part of FASB standards and include:
• Unrealized Gains and losses on available for sale securities as required by FASB
Standard 115
• Gains and losses on derivatives held as cash flow hedges as required by FASB Standard
133.
• Gains and losses resulting from converting foreign currency subsidiaries to the parent
currency as required by FASB Standard 52.
• Minimum pension liability adjustments, as required by FASB Standard 158.
• Unrealized gains and losses from a foreign currency hedge of a net investment in a
foreign operation as required by FASB Standard 133.
Treasury Stock
Treasury stock is the shares repurchased by a company of its own stock. They are not offered for
sale to investors and not considered to be outstanding. There is no limit to how long a company
may hold on its treasury stock. The shares remain active and may be resold by the company at
any time. Treasury stock does not pay a dividend and has no voting rights. When a company
buys its own stock, the company’s cash on hand is reduced and total shareholder equity is
reduced. Treasury stock is often reflected as a negative number.
There are many reasons why companies repurchase their stock. One reason is management
belief the stock is undervalued. Management might hold the shares with the intention of
reselling them to raise cash when the stock price rises. Another reason is to help fend off a
hostile takeover.
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Total Shareholders’ Equity
Total shareholders’ equity is the balance of the company’s assets less the liabilities. The
shareholders’ equity account found on the balance sheet should be the same as the Total
Shareholders’ Equity found on the Statement of Shareholders’ Equity.
Question 4.20 – How well does your company invest in its future?
Enter the amounts, for all three periods, for the Retained Earnings per share and the
Shareholders’ Equity per share from your company’s Statement of Shareholders’ Equity. For
each period, calculate the Retained Earnings Ratio using
the following formula.
Retained Earnings Per Share
÷ Shareholders’ Equity per share
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and
the next previous year. Describe the trend for each of the major accounts. Describe the trend
direction. Use phrases like “up only this year but level in previous years”, “consistently up”,
“down only this year”, “consistently down” or “level for all years”. Also, in your opinion is the
trend
positive, negative, insignificant?
Dividends paid to shareholders from earnings cannot be used to help the company grow. One
way for the company to grow is to invest the earnings in the core business for the company.
Generally, companies will retain their earnings to invest in growth opportunities, such as buying
new equipment, investing in research and development or acquisitions.
Last, explain why your company is or is not investing adequately in
its future.
Question 4.20 – How well does your company invest in its future?
Accounts Current Yr. Previous Yr. Next Previous Yr. Trend Description
A Retained Earnings per share
B Shareholders’ Equity per
share
C Retained Earnings Ratio
D Is your company investing
adequately in its future and
why?
Question 4.21 – Capital and Treasury Stock
Enter the amounts, for all three periods, for number of shares outstanding for common stock and
preferred stock outstanding and treasury stock. List the addition ‘classes’ of capital stock which
you company may have. Enter the amounts in millions of shares from the SEC Form 10K, for
the current year, the previous year and the next previous year. Enter “NA” if your company has
no preferred stock or treasury stock. Describe the trend for each of the major accounts.
Describe the trend direction. Use phrases like up only this year but level in previous years,
consistently up, down only this year, consistently down or level for all years. Also, in your
opinion is the trend positive, negative, insignificant?
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Video 37 Types of common stock
Question 4.21 – Capital and Treasury Stock
Accounts Current Yr. Previous Yr. Next Previous Yr. Trend Description
A Common stock
B Preferred stock
C Treasury stock
D
E
F
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Notes to the Financial Statement
General Accepted Accounting Practice, the Federal Accounting Standards Board, the Securities
and Exchange Commission and shareholders assume the company will make a full disclosure to
the shareholders in its Report to Shareholders and in its SEC Form 10-K. Financial statements
generally disclose information about a company’s past performance. The presentation is often
primarily numeric. The numbers alone are generally not sufficient to provide someone with a
full understanding of the company’s financial position and condition.
Pending lawsuits, incomplete transactions, tax disputes, company
takeovers, discontinued operations or other conditions may have
imminent and significant effect on the company’s financial condition.
The Notes to the Financial Statement include any and all information the
company believes is necessary to provide a transparent financial
statement to the reader. Additionally, the Notes are intended to disclose
all information required for a complete understanding of the company’s
financial statements.
What can you find in the Notes?
While there is no standard structure to the Notes section of the financial statement, they generally
follow a predictable format. Information about the following items can generally be found in the
Notes.
• Corporate Information of the Company
• Significant accounting policies:
o Basis of preparation
o Summary of significant Accounting Policies
o Subsidiaries and basis of consolidation
o Goodwill
o Property, plant and equipment, and depreciation
• New standards and interpretation issued but not yet effective
• Significant accounting estimates and judgments
• Revenue
• Cost of sales
• Other operating income
• Finance costs
• Loss before tax
• Employee benefits expense
• Directors’ remuneration
• Income tax expense
• Loss per share
• Property, plant and equipment
• Prepaid lease payments
• Investment in subsidiaries
• Investment properties
• Goodwill on consolidation
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• Other investments
• Long term receivables
• Inventories
• Trade and other receivables
• Due from a customer on contracts
• Cash and cash equivalents
• Non-current assets held for sale
• Borrowings
Video 38 Notes to the financial statement
Question 4.22 –Basic information about your company not found on the financial statement?
How is information about the following items disclosed by your company in the Notes to the
Financial Statement? Generally, this information can be found in Note 1. The titles may not be
identical to the title in the question. Enter “NA” if your company has no notes for a question.
Question 4.22 –Basic information about your company not found on the financial statement?
A Description of Business
B Consolidation
C Foreign Currency
D Cash and Cash Equivalents
E Inventories
Question 4.23 –Other significant information about your company not found on the financial
statement?
How is information about the following items disclosed by your company in the Notes to the
Financial Statement? The titles may not be identical to the title in the question. Enter the
information disclosed about each of the items in the Notes for your company. Additionally,
enter the note number in which the information was disclosed. Last, explain why you believe
this disclosure is or is not significant. Enter “NA” if your company has no notes for a question.
Question 4.23 –Other information about your company not found on the financial statement?
Accounts Note # Disclosure Importance
A Discontinued Operations
B Related Parties
C Contingencies
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Chapter 4: Self-Assessment
Use this self-assessment module to help you know where you are in learning the contents for
Chapter 4. You’ll get a better understanding where you are and what you need to do to cross the
Chapter 5 – Looking Under the Hood of Your Annual
Report
“Give us the tools and we will do the job”, Winston Churchill
In many ways, making an investment decision about a public company is like buying a used car.
The Chairman’s message and financial statements will present the best possible “polished and
shiny” image of the company. Before purchasing a used car, it is useful to look under the hood
and inspect the engine. Like a used car, it is important to look behind the numbers and “under
the hood” of the annual report for a public company. To do the job you will need some tools.
With the right tools, you should be able to look make informed
judgments about your company and its management. After
understanding how to read your company’s annual report to
shareholders, you are ready to begin the process of judging the viability
of your company. Fortunately, there are time tested analytical tools to
help you. Knowing the tools and how to use them will make the job
much easier and more productive. There are two basic types of the
tools. They are ratios and trends. Each has its use. Together, they can
produce powerful and gratifying results. The most widely used ratios,
generally fall into four categories.
Liquidity Ratios
These ratios measure your company’s ability to pay its short-term debt obligations. Generally, a
higher the ratio of liquid assets to short-term liabilities is better. It usually indicates a company
can pay its short-term debts and still fund its ongoing operations. A low ratio might be a
warning sign.
CHAPTER
5
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Profitability Ratios
These ratios measure how well your company’s management is able to control expenses to
generate margins and the overall efficiency in producing returns. Generally, the higher the ratio
is the
better the company’s performance.
Leverage ratios
These ratios measure how well your company might be able to secure additional debt. They also
indicate how well it may be able to service existing debt. Ratios with higher values generally
indicate a restrained ability to borrow additional debt. Lenders are generally interested in these
ratios. A limited ability to borrow funds
can place a burden on growth.
Turnover Ratios
These ratios measure the efficiency your company applies to the use of certain assets and
resources. Generally, most analysis focuses on the activity associated with inventory and
accounts receivable. Generally, the higher the ratio is the better the company’s performance.
These ratios are best use in two ways. The first way is to compare the same ratio over a
minimum three year period to create a trend. A single year will not be as illuminating a trend.
To better understand your company it is also important to identify anomalies and learn why they
occurred. The second way to work with these ratios is to compare your company’s ratios to
those of other companies in the same industry. By themselves, your company’s ratios may
appear satisfactory. However, if your company’s ratios are not as strong as its competitive peers,
it may indicate your company has issues to resolve.
Industry and Competitor Ratios
There are several sources for information about the financial ratios for your company’s
competitors. The MSN Money website calculates a large number of financial ratios for public
companies. The calculations also include the relevant industry ratios.
• Growth
• Price Ratios
• Profit Margins
• Financial Condition
• Investment Returns
• Management Efficiency
• 10-Yr Summary Ratios
How well can your company pay the bills?
These ratios can help you measure how well your company is able to pay its short-term debt
obligations. Several useful ratios to help you evaluate how well your company can pay the bills
are Working Capital Balance, Acid Test Ratio, Current Ratio and Cash Ratio.
Question 5.1 – Working Capital Balance
The working capital balance compares current assets to current liabilities. It can also
demonstrate the amount of liquid reserve the company has available to handle contingencies. A
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high working capital balance is necessary if your company might have difficulty borrowing on
short notice. A low working capital balance might mean your company may have difficulty
meeting its short-term obligations.
Video 39 Liquidity ratios
Enter the amounts, for all three periods, for the Current Assets and the Current Liabilities from
your company’s Balance Sheet. For each period, calculate the Working Capital Balance using
the following formula.
Current Assets – Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Working Capital
Balance. Use phrases like up only this year but level in previous years, consistently up, down
only this year, consistently down or level for all years. Also, in your opinion is the trend
positive, negative, insignificant?
Last, in your opinion, explain why the Working Capital Balance for your company is or is not
adequate for its future.
Question 5.1 – Working Capital Balance
Accounts Current Yr. Previous Yr. Next Previous Yr.
A
Current Assets
B
Current Liabilities
C Working Capital Balance
D Why is or is not the Working Capital
Balance adequate for your company?
E Working Capital Balance Trend
Description
Question 5.2 – Acid Test or Quick Ratio
This ratio will help you measure the degree of liquidity for your company. The quick ratio
compares the company’s cash, cash equivalents and accounts receivable to the current liabilities.
The primary difference between the current ratio and the quick ratio is the quick ratio does not
include inventory and prepaid expenses in the calculation. The company’s quick ratio should be
lower than its current ratio. It is a severe test of liquidity.
Enter the amounts, for all three periods, for the Cash, Accounts Receivable, Short-term
investments and the Current Liabilities from your company’s Balance Sheet. For each period,
calculate the Acid Test Ratio using the following formula.
(Cash + Accounts Receivable + Short-term Investments) ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Acid Test Ratio.
Use phrases like up only this year but level in previous years, consistently up, down only this
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year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Acid Test Ratio for your company is or is not adequate for
its future.
Video 40 Acid test ratio
Question 5.2 – Acid Test or Quick Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Cash
B Accounts Receivable
Short term investments
Current Liabilities
C Acid Test Ratio
D Why is or is not the Acid Test Ratio
adequate for your company?
E Acid Test trend Description
Question 5.3 – Current Ratio
This is another ratio to help you measure the degree of liquidity for your company. The Current
Ratio compares the company’s current assets to its current liabilities.
Enter the amounts, for all three periods, for the Current Assets and the Current Liabilities from
your company’s Balance Sheet. For each period, calculate the Current Ratio using the following
formula.
Current Assets ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Current Ratio. Use
phrases
like up only this year but level in previous years, consistently up, down only this year,
consistently down or level for all years. Also, in your opinion is the trend positive, negative,
insignificant?
Last, in your opinion, explain why the Current Ratio for your company is or is not adequate for
its future.
Question 5.3 – Current Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Current Assets
B Current Liabilities
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C Current Ratio
D Why is or is not the Current Ratio
adequate for your company?
E Current Ratio trend description
Question 5.4 – Cash Ratio
This is ratio to help you measure the degree of short term liquidity for your company. The Cash
Ratio compares the company’s cash to its current liabilities. The ratio is particularly useful if the
company’s receivables and its inventory are pledged or if there may be liquidity problems with
inventory and receivables.
Enter the amounts, for all three periods, for the Cash and the Current Liabilities from your
company’s Balance Sheet. For each period, calculate the Cash Ratio using the following
formula.
Cash ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Cash Ratio. Use
phrases like up only this year but level in previous years, consistently up, down only this year,
consistently down or level for all years. Also, in your opinion is the trend positive, negative,
insignificant?
Last, in your opinion, explain why the Cash Ratio for your company is or is not adequate for its
future.
Question 5.4 – Cash Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Cash
B Current Liabilities
C Cash Ratio
D Why is or is not the Cash Ratio
adequate for your company?
E Cash Ratio trend description
Is your company making money?
These ratios will help you measure how well your company’s management is able to manage
expenses to generate margins and the overall efficiency in producing returns. Generally, the
higher the ratio is the better the company’s performance. The following ratios can help you
measure how well your company is making money.
• Return on Sales Ratio
• Return on Equity Ratio
• Return on Assets Ratio
• Asset Turn Ratio
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• Gross Profit Margin Ratio
Video 41 Profitability ratios
Question 5.5 – Return on Sales Ratio
This ratio will help you measure the net income generated by each dollar of sales. It is an
effective gauge for determining the rate of profit returned on sales. The Return on Sales Ratio
can be useful for estimating how well the company can handle price wars, sales declines and
rising costs.
Enter the amounts, for all three periods, for the Net Income and the Net Sales from your
company’s Income Statement. For each period, calculate the Return on Sales Ratio using the
following formula.
Net Income ÷ Net Sales
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Return on Sales
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Return on Sales Ratio for your company is or is not
adequate for its future.
Question 5.5 – Return on Sales Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Net Income
B Net Sales
C Return on Sales Ratio
D Why is or is not the Return on Sales
Ratio adequate for your company?
E Return on Sales Ratio Trend
Description
Question 5.6 – Return on Equity Ratio
This ratio is widely used by many investors. It is an effective measure for the income earned on
the shareholder’s investment in the business. The Return on Equity Ratio can be useful for
making a value judgment on how well management is create profits with the investment
shareholders have in the company. The higher the Return on Equity Ratio, the better it is.
Enter the amounts, for all three periods, for the Net Income from your company’s Income
Statement and Shareholders’ Equity from the balance sheet. For each period, calculate the
Return on Equity Ratio using the following formula.
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Net Income ÷ Shareholders’ Equity
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Return on Equity
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Return on Equity Ratio for your company is or is not
adequate for its future.
Question 5.6 – Return on Equity Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Net Income
B Shareholders’ Equity
C Return on Equity Ratio
D Why is or is not the Return on Equity
Ratio adequate for your company?
E Return on Equity Ratio trend description
Question 5.7 – Return on Assets Ratio
This ratio is used to measure how well a company is turning its assets into profit. It may sound
like the total assets turnover ratio, but it is different. The total assets turnover ratio measures
how effectively a company’s assets generate revenue. It is a useful tool to measure how well
management is turning the company’s assets into profit. The higher the value for the Return on
Assets Ratio, the better the company is performing.
Enter the amounts, for all three periods, for the Net Income from your company’s Income
Statement and Total Assets from the balance sheet. For each period, calculate the Return on
Assets Ratio using the following formula.
Net Income ÷ Total Assets
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Return on Assets
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Return on Assets Ratio for your company is or is not
adequate for its future.
Question 5.7 – Return on Assets Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
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A Net Income
B Total Assets
C Return on Assets Ratio
D Why is or is not the Return on Assets
Ratio adequate for your company?
E Return on Asset Ratio trend description
Question 5.8 – Asset Turnover Ratio
This ratio is used to measure how well a company is using its assets to create revenues. The
higher the value for the Asset Turnover Ratio, the better the company is performing.
Enter the amounts, for all three periods, for the Net Sales from your company’s Income
Statement and Total Assets from the balance sheet. For each period, calculate the Asset
Turnover Ratio using the following formula.
Net Sales ÷ Total Assets
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Asset Turn Ratio.
Use phrases like up only this year but level in previous years, consistently up, down only this
year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Asset Turnover Ratio for your company is or is not
adequate for its future.
Question 5.8 – Asset Turnover Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Net Sales
B Total Assets
C Asset Turn Ratio
D Why is or is not the Assets Turn
Ratio adequate for your company?
E Asset Turnover Ratio trend
description
Question 5.9 – Gross Profit Margin Ratio
This ratio is used to measure the relationship between net sales revenue and the cost of goods
sold. It shows the amount of each dollar of sales your company turns into profit. The higher the
value for the Gross Profit Margin Ratio, the better your company is performing. It is also
important to note different industries may have very different gross margins.
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Enter the amounts, for all three periods, for the Gross Profit and Net Sales from your company’s
Income Statement. For each period, calculate the Gross Profit Margin Ratio using the following
formula.
Gross Profit ÷ Net Sales
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Gross Profit
Margin Ratio. Use phrases like up only this year but level in previous years, consistently up,
down only this year, consistently down or level for all years. Also, in your opinion is the trend
positive, negative, insignificant?
Last, in your opinion, explain why the Gross Profit Margin Ratio for your company is or is not
adequate for its future.
Question 5.9 – Gross Profit Margin Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Gross Profit
B Net Sales
C Gross Profit Margin Ratio
D Why is or is not the Gross Profit Margin
Ratio adequate for your company?
E Gross Profit Margin Ratio trend
description
How well is management performing
Examining how well your company’s assets and resources are used to create profit is one way to
measure how well management is performing. For many companies, inventory and accounts
receivable the two most significant profit generating resources. Generally, most analysis focuses
on the activity associated with inventory and accounts receivable. Several effective ratios for
gauging how well your company’s management is performing are:
• Inventory Turn Ratio
• Days in Inventory Ratio
• Accounts Receivable Turnover Ratio
• Average Collection Period
• Accounts Payable Turnover Ratio
• Net Working Capital Turnover Ratio
Question 5.10 – Inventory Turnover Ratio
This ratio is used to measure how effectively your company converts its inventory into cash. It
shows how well your company manages its inventory levels. If inventory turnover is too low, it
may indicate the company is overstocking inventory. It may also indicate the company is having
issues selling products. The higher the value for the Inventory Turnover Ratio, the better your
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company is performing. It is also important to note different industries may have very different
inventory turn ratios. For some industries, the Inventory Turnover Ratio is not a significant as it
is for other
industries.
Video 42 Inventory ratios
Enter the amounts, for all three periods, for the Cost of Goods Sold from your company’s
Income Statement and Inventory from the balance sheet. For each period, calculate the
Inventory Turn Ratio using the following formula.
.
Cost of Goods Sold
÷ Inventory
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Inventory Turn
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Inventory Turnover Ratio for your company is or is not
adequate for its future.
Question 5.10 – Inventory Turnover Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Cost of Goods Sold
B Inventory
C Inventory Turn Ratio
D Why is or is not the Inventory Turn
Ratio adequate for your company?
E Inventory Turnover Ratio trend
description
Question 5.11 – Days in Inventory Ratio
This ratio is used to measure how effectively your company holds its inventory before it is sold.
Generally, the longer inventory is remains unsold, the greater the chance it may not be sold or
sold at less than its value. The Days in Inventory Ratio more important for companies with
inventory that is perishable or subject to obsolescence. Companies with short product life cycles
like high technology, automobile, toys and fashion might find this ratio important.
Enter the value, for all three periods, for the Inventory Turnover Ratio. For each period,
calculate the Days In Inventory Ratio using the following formula.
365 ÷ Inventory Turnover Ratio
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Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Days In Inventory
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Days In Inventory Ratio for your company is or is not
adequate for its future.
Question 5.11 – Days In Inventory Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A 365 365 365 365
B Inventory Turn Ratio
C Days In Inventory Ratio
D Why is or is not the Days In Inventory
Ratio adequate for your company?
E Days in Inventory Ratio trend
description
Question 5.12 – Accounts Receivable Turnover Ratio
This ratio is used to measure how effectively your company is able to collect from its customers.
A high turnover value is better. It shows your company is collecting revenues effectively and
customers pay bills on time. A high figure also suggests that a firm’s credit and collection
policies are sound. Accounts receivable turnover may differ between different industries. For
some industries, the Accounts Receivable Turnover Ratio is not a significant as it is for other
industries.
Enter the amounts, for all three periods, for the Net Sales from your company’s Income
Statement and Accounts Receivable from the balance sheet. For each period, calculate the
Accounts Receivable Turnover Ratio using the following formula.
Net Sales ÷ Accounts Receivable
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Accounts
Receivable Turnover Ratio. Use phrases like up only this year but level in previous years,
consistently up, down only this year, consistently down or level for all years. Also, in your
opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Accounts Receivable Turnover Ratio for your company is
or
is
not adequate for its future.
Question 5.12 – Accounts Receivable Turnover Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Net Sales
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B Accounts Receivable
C Accounts Receivable Turnover Ratio
D Why is or is not the Accounts Receivable
Turnover Ratio adequate for your company?
E Accounts Receivable Turnover Ratio trend
description
Question 5.13 – Average Collection Period
This ratio is used to measure how effectively your company collects money from customers.
The Average Collection Period shows the average number of days the company must wait for its
Accounts Receivable to be paid. Comparing the days in the average collection period to the
payment terms generally available to customers can help describe how quickly the company is
collecting its money. Often, the longer receivables remain unpaid the more difficult they are to
collect.
Enter the value, for all three periods, for the Accounts Receivable Turnover Ratio. For each
period, calculate the Average Collection Period using the following formula.
365 ÷ Accounts Receivable Turnover Ratio
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Average
Collection Period. Use phrases like up only this year but level in previous years, consistently up,
down only this year, consistently down or level for all years. Also, in your opinion is the trend
positive, negative, insignificant?
Last, in your opinion, explain why the Average Collection Period for your company is or is not
adequate for its future.
Question 5.13 – Average Collection Period
Accounts Current Yr. Previous Yr. Next Previous Yr.
A 365 365 365 365
B Accounts Receivable Turnover Ratio
C Average Collection Period
D Why is or is not the Average Collection
Period adequate for your company?
E Average Collection Period trend
description
Question 5.14 – Accounts Payable Turnover Ratio
This ratio is used to measure the length of time needed for your company to repay its vendors.
A high turnover value is better than a low turnover value. Generally, it shows your company is
paying bills on time. The ratio might be a good barometer of your company’s financial stability.
A high Account Payable Turnover ratio indicates your company produces cash quickly. A low
ratio might infer your company may have cash flow issues.
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Enter the amounts, for all three periods, for the Cost of Goods Sold from your company’s
Income Statement and Accounts Payable from the balance sheet. For each period, calculate the
Accounts Payable Turnover Ratio using the following formula.
Cost of Goods Sold ÷ Accounts Payable
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Accounts Payable
Turnover Ratio. Use phrases like up only this year but level in previous years, consistently up,
down only this year, consistently down or level for all years. Also, in your opinion is the trend
positive, negative, insignificant?
Last, in your opinion, explain why the Accounts Payable Turnover Ratio for your company is or
is not adequate for its future.
Question 5.14 – Accounts Payable Turnover Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Cost of Goods Sold
B Accounts Payable
C Accounts Payable Turnover Ratio
D Why is or is not the Accounts Payable
Turnover Ratio adequate for your company?
E Accounts Payable Turnover Ratio trend
description
Question 5.15 – Net Working Capital Turnover Ratio
The company’s operations and inventory generate sales. This ratio is used to measure how well
the money your company uses to support its operations generates sales. Generally, a higher ratio
means the company is generating more sales for each dollar spent on operations. A high
turnover value is better than a low turnover value.
Working capital is the difference between current assets and current liabilities. To calculate
working capital for your company use the following formula:
Current Assets – Current Liabilities
Working Capital Calculation
Accounts Current Yr. Previous Yr. Next Previous Yr.
Current Assets
Current Liabilities
Working Capital
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Enter the amounts, for all three periods, for the Net Sales from your company’s Income
Statement and the Working Capital. For each period, calculate the Net Working Capital
Turnover Ratio using the following formula.
Net Sales ÷ Working Capital
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Net Working
Capital Turnover Ratio. Use phrases like up only this year but level in previous years,
consistently up, down only this year, consistently down or level for all years. Also, in your
opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Net Working Capital Turnover Ratio for your company is
or is not adequate for its future.
Question 5.15 – Net Working Capital Turnover Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Net Sales
B Working Capital
C Net Working Capital Turnover Ratio
D Why is or is not the Net Working Capital
Turnover Ratio adequate for your company?
E Net Working Capital Turnover Ratio trend
description
How much can your company borrow
Leverage Ratios are an important group of ratios. They describe how well your company is
carrying its present debt, how the debt might affect the company and how much additional debt it
might support. Some significant ratios to help evaluate your company’s debt are:
• Debt to Income Ratio
• Debt to Total Assets
• Gearing Ratio or Long Term Debt to Shareholders’ Equity
Ratio
• Interest Coverage Ratio or Debt Service Ratio
Video 43 Leverage ratios
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Question 5.16 – Debt to Equity Ratio
This ratio is used to compare the amount of capital provided by lenders compared to the amount
of capital provided by shareholders. The Debt to Income Ratio helps to signal the possibility of
debt problems. A company overleveraged with debt makes itself vulnerable to market
downturns and unforeseen contingencies. A reasonable balance between debt and equity is
generally a healthy position for a company. Depending on the industry and company, a Debt to
Equity Ratio between 0.5 and 1.5 is generally acceptable.
Enter the amounts, for all three periods, for the Total Liabilities and Shareholders’ Equity from
your
company’s balance sheet. For each period, calculate the Debt to Equity Ratio using the
following formula.
Total
Liabilities ÷ Shareholders’ Equity
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Debt to Equity
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Debt to Equity Ratio for your company is or is not
acceptable for its future.
Question 5.16 – Debt to Equity Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Total Liabilities
B Shareholders’ Equity
C Debt to Equity Ratio
D Why is or is not the Debt to Equity
Ratio acceptable for your company?
E Debt to Equity Ratio trend
description
Question 5.17 – Debt to Asset Ratio
This ratio is used to compare the amount of debt to the company’s assets. The Debt to Asset
Ratio shows how much of your company’s assets were acquired through debt. A ratio greater
than one generally means most of the company’s assets are financed through debt. These
companies are generally described as “highly leveraged” and could vulnerable from creditor
demands for repayment. Depending on the company and the industry, a Debt to Asset Ratio in
excess of 65% may indicate debt issues for a company.
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Enter the amounts, for all three periods, for the Total Liabilities and Total Assets from your
company’s balance sheet. For each period, calculate the Debt to Equity Ratio using the
following formula.
Total Liabilities ÷ Total Assets
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Debt to Asset
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Debt to Asset Ratio for your company is or is not
acceptable for its future.
Question 5.17 – Debt to Asset Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Total Liabilities
B Total Assets
C Debt to Asset Ratio
D Why is or is not the Debt to Asset
Ratio acceptable for your company?
E Debt to Asset Ratio tend description
Question 5.18 – Gearing Ratio or Long Term Debt to Shareholders’ Equity Ratio
This ratio is used to compare the amount of long term debt to the shareholders’ equity. The
Gearing Ratio shows how well your company’s will be able to service, satisfy existing long term
debt or acquire additional long term debt. A company with a high Gearing Ratio is more
vulnerable to competitor assaults, price reductions and business downturns. Generally, no matter
what the difficulty facing the company, it must continue to service its debt. Companies with a
low Gearing Ratio usually have sufficient equity to manage through difficult periods.
Video 44 Gearing ratio
Enter the amounts, for all three periods, for the Long Term Liabilities and Shareholders’ Equity
from your company’s balance sheet. For each period, calculate the Gearing Ratio using the
following formula.
Long Term Liabilities ÷ Shareholders’ Equity
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Gearing Ratio. Use
phrases like up only this year but level in previous years, consistently up, down only this year,
consistently down or level for all years. Also, in your opinion is the trend positive, negative,
insignificant?
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Last, in your opinion, explain why the Gearing Ratio for your company is or is not acceptable for
its future.
Question 5.18 – Gearing Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Long Term Liabilities
B Shareholders’ Equity
C Gearing Ratio
D Why is or is not the Gearing Ratio
acceptable for your company?
E Gearing Ratio trend description
Question 5.19 – Interest Coverage Ratio or Debt Service Ratio
This ratio is used to discover how easily your company can pay the interest on its outstanding
debt. A low Interest Coverage Ratio can mean your company may find it difficult to pay its debt
expense. An
Interest Coverage Ratio below 1 might imply a company is not producing sufficient
income to pay the interest expenses. Generally, this would indicate caution for an investor.
Enter the amounts, for all three periods, for the Profit Before Taxes and Interest Expense from
your company’s Income Statement. For each period, calculate the Interest Coverage Ratio using
the following formula.
(Profit Before Taxes+ Interest Expense) ÷ Interest Expense
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the
previous year and the next previous year. Describe the trend direction for the Interest Coverage
Ratio. Use phrases like up only this year but level in previous years, consistently up, down only
this year, consistently down or level for all years. Also, in your opinion is the trend positive,
negative, insignificant?
Last, in your opinion, explain why the Interest Coverage Ratio for your company is or is not
acceptable for its future.
Question 5.19 – Interest Coverage Ratio or Debt Service Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Profit Before Taxes
B Interest Expense
C Interest Coverage Ratio
D Why is or is not the Interest Coverage
Ratio acceptable for your company?
E Interest Coverage Ratio trend
description
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How is the stock performing?
Generally, the market price for shares of a publicly traded company is based on the supply and
demand for the shares. Typically, investors will buy and sell shares based on information about
the company. The stock market trend for a company’s stock may be a good indicator for buying
or selling the company’s shares. There are several ratios to help sharpen the decision making for
buying or selling shares of a public company. However, no ratios, hot information, experience,
system or crystal ball can unfailingly predict the outcome for the purchase or sale of a publicly
traded stock.
There are several ratios to help make more informed purchase and sale decisions of publicly
traded stock. They are:
• Earnings per Share
• Price/Earnings Ratio
• Dividend Per Share
• Dividend Payout Ratio
Question 5.20 –Earnings per Share
Earnings per share means the part of a company’s earnings, net of taxes and preferred stock
dividends, allotted to each share of common stock. It is a widely used barometer to measure a
company’s profitability per share of common stock. Historically, the Earnings Per Share has
played a significant role in determining the market price for stocks. A company’s earnings can
change suddenly for many reasons including manipulation, accounting changes, and
restatements. For this and many other reasons, the earnings per share is not an absolute
determinate of the market value for a
company’s shares.
Enter the amounts, for all three periods, for the Earnings Per Share from your company’s Income
Statement.
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and
the next previous year. Describe the trend direction for the Earnings Per Share. Use phrases like
up only this year but level in previous years, consistently up, down only this year, consistently
down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Price/Earnings Ratio for your company’s stock is or is not
adequate for its future.
Question 5.20 – Earnings per Share
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry
Ratio
A Earnings Per Share
B Why is or is not the Earnings Per Share
adequate for your company’s stock?
C Earnings Per Share trend description
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Question 5.21 – Price/Earnings Ratio
This ratio is used to learn what investors are currently willing to pay for the company’s earnings.
The Price/Earnings Ratio is one of the most widely used measures of stock value. It shows the
relationship between the current stock price and the company’s per share of stock. The higher
the Price/Earnings Ratio, the more the market is willing to pay for a company’s earnings. Some
investors believe a high P/E indicates an overpriced stock. This may be true, but it may also
mean the market is optimistic about the stock’s future and is willing to pay more for the stock. A
low Price/Earnings Ratio might suggest “no confidence” for the stock or it could mean the price
is undervalued and may rise in the future. Some “undervalued” stocks have become big winners
for some investors. Please note there is a strong emphasis on the word “some”.
Enter the amounts, for all three periods, for the current price of your company’s common stock.
Also enter Earnings Per Share from your company’s Income Statement. For each period,
calculate the Price/Earnings Ratio using the following formula.
Current Stock Price ÷ Earnings Per Share
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and
the next previous year. Describe the trend direction for the Price/Earnings Ratio. Use phrases
like up only this year but level in previous years, consistently up, down only this year,
consistently down or level for all years. Also, in your opinion is the trend positive, negative,
insignificant?
Last, in your opinion, explain why the Price/Earnings Ratio for your company’s stock is or is not
adequate for its future.
Video 45 Price to earnings ratio
Question 5.21 – Price/Earnings Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr. Industry Ratio
A Stock Price
B Earnings Per Share
C Price/Earnings Ratio
D Why is or is not the Price/Earnings Ratio
adequate for your company’s stock?
E Price/Earnings Ratio trend description
Question 5.22 –Dividend per Share
Dividend per share means the part of a company’s earnings paid directly to shareholders for each
share of common stock. For companies with preferred stock, the dividends for the preferred
stock are identified separate of the dividends for common stock. For some investors dividend
income is very significant. Dividends provide income to investors even when the market price
for the share may decline.
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Companies with a strategic focus on growth may choose to reinvest all their earnings in the
company. Typically growth companies will pay low or no dividend. Often, companies might
pay high dividends to their shareholders when they have reached their maturity and there is little
opportunity for growth. For mature companies, a more effective use of the earnings is to return
them to the shareholders in the form of dividends.
Enter the amounts, for all three periods, for the Dividend Per Share of common stock from your
company’s Income Statement.
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and
the next previous year. Describe the trend direction for the Dividend Per Share. Use phrases like
up only this year but level in previous years, consistently up, down only this year, consistently
down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Dividend per Share for your company’s stock is or is not
adequate for its future.
Question 5.22 – Dividend per Share
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Dividend Per Share
B Why is or is not the Dividend Per Share
adequate for your company’s stock?
C Dividend Per Share trend description
Question 5.23 – Dividend Payout Ratio
This ratio is used to measure the percent of the company’s earnings being returned to the
shareholders. The Dividend Payout Ratio is another widely used measure of stock value
particularly for those investors interested in stocks with income. It allows investors to identify
companies with sufficient internal growth to possibly pay dividends in the future. A ratio
between 40% and 60% would allow a company to pay a dividend while continuing to reinvest
earnings in the company.
Enter
the amounts, for all three periods, for Earnings Per Share and Dividend Per Share from
your company’s Income Statement. For each period, calculate the Dividend Payout Ratio using
the following formula.
Dividend Per Share ÷ Earnings Per Share
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and
the next previous year. Describe the trend direction for the Dividend Payout Ratio. Use phrases
like up only this year but level in previous years, consistently up, down only this year,
consistently down or level for all years. Also, in your opinion is the trend positive, negative,
insignificant?
Last, in your opinion, explain why the Dividend Payout Ratio for your company’s stock is or is
not adequate for its future.
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Question 5.23 – Dividend Payout Ratio
Accounts Current Yr. Previous Yr. Next Previous Yr.
A Dividend Per Share
B Earnings Per Share
C Dividend Payout Ratio
D Why is or is not the Dividend Payout Ratio
adequate for your company’s stock?
E Dividend Payout Ratio trend description
Chapter 5: Self-Assessment
Use this self-assessment module to help you know where you are in learning the contents for
Chapter 5. You’ll get a better understanding where you are and what you need to do to cross the
• 10-K A comprehensive summary report of a company’s performance that must be
submitted annually to the Securities and Exchange Commission, including information
such as company history, organizational structure, equity, holdings, earnings per share,
subsidiaries, etc.
• 10-Q A comprehensive report of a company’s performance that must be submitted
quarterly by all public companies to the Securities and Exchange Commission. In the 10-
Q, firms are required to disclose relevant information regarding their financial position.
The form must be submitted on time, and the information should be available to all
interested parties.
• Accounts Payable A payable is created when a company receives a product or service
before it pays for it. This item appears on the company’s balance sheet as a current
liability, since the expectation is the liability will be paid in less than a year. A common
abbreviation for accounts payable is “A/P”.
• Accounts Payable Turnover Ratio This ratio is used to measure the length of time
needed for your company to repay its vendors. A high turnover value is better than a low
turnover value. Generally, it shows your company is paying bills on time. The ratio might
be a good barometer of your company’s financial stability. A high Account Payable
Turnover ratio indicates your company produces cash quickly. A low ratio might infer
your company may have cash flow issues. Enter the amounts, for all three periods, for the
Cost of Goods Sold from your company’s Income Statement and Accounts Payable from
the balance sheet. For each period, calculate the Accounts Payable Turnover Ratio using
the following formula. Cost of Goods Sold ÷ Accounts Payable
• Accounts Receivable An account receivable is a current asset resulting from billing a
customer who owes money to the company for goods and services provided to the
customer.
• Accounts Receivable Turnover Ratio This ratio is used to measure how effectively
your company is able to collect from its customers. A high turnover value is better. It
shows your company is collecting revenues effectively and customers pay bills on time.
A high figure also suggests that a firm’s credit and collection policies are sound.
Accounts receivable turnover may differ between different industries. For some
industries, the Accounts Receivable Turnover Ratio is not as significant as it is for other
industries. Enter the amounts, for all three periods, for the Net Sales from your
company’s Income Statement and Accounts Receivable from the balance sheet. For each
period, calculate the Accounts Receivable Turnover Ratio using the following formula.
Net Sales ÷ Accounts Receivable
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• Accrued Income Tax The taxes assessed on a company, either on its earnings or
on the value of its property, and not yet paid. Accrued income taxes are listed as a
liability on the company’s balance sheet.
• Accrued Salaries Accrued salaries and wages are salaries and wages earned by
employees during a given period that have not yet been paid to those employees.
Generally salaries and wages are not paid immediately at the end of each day. They are
withheld and paid after a week, 2 weeks or a month. The balance sheet reflects this “lag”
as an accrued payable.
• Accumulated Other Comprehensive Income (Loss) An entry that is generally found
in the equity section of a corporation’s balance sheet. Accumulated other comprehensive
income measures gains and losses of a business that have yet to be realized. This account
includes the company’s income not reported as part of net income on the company’s
income statement and may also include unrealized gains and losses on certain
investments.
• Acid Test Ratio This quick ratio compares the company’s cash, cash
equivalents and accounts receivable to the current liabilities. The primary difference
between the current ratio and the quick ratio is the quick ratio does not include inventory
and prepaid expenses in the calculation. The company’s quick ratio should be lower than
its current
ratio. It is a severe test of liquidity.
• Altman Z-Score A formula may be used to predict the probability that a firm will go
into bankruptcy within two years. Z-scores are used to predict corporate defaults and an
easy-to-calculate control measure for the financial distress status of companies. The Z-
score is a linear combination of four or five common business ratios, weighted by
coefficients. The coefficients are estimated by identifying a set of firms which had
declared bankruptcy and then collecting a matched sample of firms which had survived,
with matching by industry and approximate size (assets).
• Annual Report To Shareholders The annual report to shareholders is the principal
document used by most public companies to disclose corporate information to their
shareholders.
• Arthur Andersen A former accounting firm that provided auditing, tax, and
consulting services to large corporations. In 2002, the firm voluntarily surrendered its
licenses to practice as Certified Public Accountants in the United States after being found
guilty of criminal charges relating to the firm’s handling of the auditing of Enron, an
energy corporation based in Texas, which had filed for bankruptcy in 2001 and later
failed.
• Asset Turn Ratio The formula for the asset turnover ratio evaluates how well a
company is utilizing its assets to produce revenue. The numerator of the asset turnover
ratio formula shows revenues which is found on a company’s income statement and the
denominator shows total assets which is found on a company’s balance sheet. Total assets
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should be averaged over the period of time that is being evaluated. For example, if a
company is using 2009 revenues in the formula to calculate the asset turnover ratio, then
the total assets at the beginning and end of 2009 should be averaged. It should be noted
that the asset turnover ratio formula does not look at how well a company is earning
profits relative to assets. The asset turnover ratio formula only looks at revenues and not
profits. This is the distinct difference between return on assets (ROA) and the asset
turnover ratio, as return on assets looks at net income, or profit, relative to assets.
• Average Collection Period This ratio is used to measure how effectively your
company collects money from customers. The Average Collection Period shows the
average number of days the company must wait for its Accounts Receivable to be paid.
Comparing the days in the average collection period to the payment terms generally
available to customers can help describe how quickly the company is collecting its
money. Often, the longer receivables remain unpaid the more difficult they are to collect.
• Balance Sheet A financial statement that summarizes a company’s assets, liabilities
and shareholders’ equity at a specific point in time. The balance sheet can help you get a
greater a sense of what the company owns and what it owes. It can also give an indication
of the resources a company has to help it grow during economic booms and to survive
during bad times.
• Bankruptcy A legal status of a person or other entity that cannot repay the debts it
owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often
initiated by the debtor.
• Board Of Directors A group of individuals that are elected as, or elected to act as,
representatives of the shareholders to establish corporate management related policies
and to make decisions on major company issues. Such issues include the hiring/firing of
executives, dividend policies, options policies and executive compensation. Every public
company must have a board of directors.
• Bondholders The owner of a government or corporate bond. Being a bondholder is
often considered safer than being a shareholder because if a company liquidates, it must
pay its bondholders before it pays its shareholders. Being a bondholder entitles one to
receive regular interest payments, if the bond pays interest (usually semiannually or
annually), as well as a return of principal when the bond matures.
• Capital “Capital” can mean many things. Its specific definition depends on the context
in which it is used. In general, it refers to financial resources available for use. 1.
Financial assets or the financial value of assets, such as cash. 2. The factories, machinery
and equipment owned by a business and used in production.
• Capital In Excess of Par Value The capital invested by shareholders through purchase
of stock directly from the corporation and not through purchase of stock on the open
market from other shareholders. It is the money a company gets from an investor in
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addition to the stated or par value of the stock. Capital in Excess of Par Value is also
called “paid in capital” or “paid in capital in excess of par value”.
• Capital Stock Capital stock is the ordinary shares of stock a company might issue to
raise money. The stock might be divided into various “classes” with each “class” having
different rights. The two most widely used classes of stock are common stock and
preferred stock.
• Cash and Cash Equivalents Cash and cash equivalents are the most liquid current
assets to be found on a company’s balance sheet. They are generally listed as the first
asset. “Cash” is not only currency but also an asset that can be quickly converted to
cash. “Cash equivalents” are treated as “cash”. Treasury bills are considered “cash
equivalents”.
• Cash Flow Statement One of the quarterly financial reports any publicly traded
company is required to disclose to the SEC and the public. The document provides
aggregate data regarding all cash inflows a company receives from both its ongoing
operations and external investment sources, as well as all cash outflows that pay for
business activities and investments during a given quarter.
• Cash Interest Coverage Ratio The Cash Interest Coverage Ratio is an indicator of
how well your company will be able to make the interest payments on its entire debt load.
A highly leveraged company will have a low ratio, and a company with a strong financial
position will have a high ratio. Any company with a cash interest ratio less than 1.0 is in
risk of potential default.
• Cash Ratio The Cash Ratio compares the company’s cash to its current liabilities. The
ratio is particularly useful if the company’s receivables and its inventory are pledged or if
there may be liquidity problems with inventory and receivables.
• Change In Accounting Principle Voluntary changes and changes resulting from the
FASB issuing a new accounting statement are posted to this section. Companies have
often faced an issue of how to reflect changes in accounting methods in financial
statements. In 2005, the FASB issued Statement no. 154, Accounting Changes and Error
Corrections. Under Statement no. 154, companies must retrospectively apply all
voluntary changes in accounting principle to previous period financial statements unless
doing so is impracticable or FASB mandates another approach. Adjustments to previous
periods would be made by directly adjusting retained earnings.
• Common Stock Securities representing equity ownership in a corporation, providing
voting rights, and entitling the holder to a share of the company’s success through
dividends and/or capital appreciation. In the event of liquidation, common shareholders
have rights to a company’s assets only after bondholders, other debt holders, and
preferred shareholders have been satisfied.
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• Contributed Capital Contributed capital is the money invested in the company by the
shareholders. The funds are paid directly to the company in exchange for the company’s
stock. Occasionally, instead of cash, an asset is exchanged for stock.
• Cost of Goods Sold The direct costs attributable to the production of the goods sold by
a company. This amount includes the cost of the materials used in creating the good
along with the direct labor costs used to produce the good. It excludes indirect expenses
such as distribution costs and sales force costs. COGS appears on the income statement
and can be deducted from revenue to calculate a company’s gross margin. Also referred
to as “cost of sales.”.
• Creditors An entity (person or institution) that extends credit by giving another entity
permission to borrow money if it is paid back at a later date. Creditors can be classified
as either “personal” or “real.” Those people who loan money to friends or family are
personal creditors. Real creditors (i.e. a bank or finance company) have legal contracts
with the borrower granting the lender the right to claim any of the debtor’s real assets
(e.g. real estate or car) if he or she fails to pay back the loan.
• Current Assets Any asset expected to last or be in use for less than one year is
considered a current asset.
• Current Ratio The Current Ratio compares the company’s current assets to its current
liabilities.
• Days in Inventory Ratio This ratio is used to measure how effectively your company
holds its inventory before it is sold. Generally, the longer inventory is remains unsold,
the greater the chance it may not be sold or sold at less than its value. The Days in
Inventory Ratio would be important for companies with inventory that is perishable or
subject to obsolescence. Companies with short product life cycles like high technology,
automobile, toys and fashion might find this ratio important. Enter the value, for all three
periods, for the Inventory Turnover Ratio. For each period, calculate the Days In
Inventory Ratio using the following formula. 360 ÷ Inventory Turnover Ratio
• Debt to Income Ratio This ratio is used to compare the amount of capital provided by
lenders compared to the amount of capital provided by shareholders. The Debt to Income
Ratio helps to signal the possibility of debt problems. A company over leveraged with
debt makes itself vulnerable to market downturns and unforeseen contingencies. A
reasonable balance between debt and equity is generally a healthy position for a
company. Depending on the industry and company, a Debt to Equity Ratio between 0.5
and 1.5 is generally acceptable. Enter the amounts, for all three periods, for the Total
Liabilities and Shareholders’ Equity from your company’s balance sheet. For each
period, calculate the Debt to Equity Ratio using the following formula. Total Liabilities ÷
Shareholders’ Equity
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• Debt to Total Assets This ratio is used to compare the amount of debt to the
company’s assets. The Debt to Asset Ratio shows how much of your company’s assets
were acquired through debt. A ratio greater than one generally means most of the
company’s assets are financed through debt. These companies are generally described as
“highly leveraged” and could vulnerable from creditor demands for repayment.
Depending on the company and the industry, a Debt to Asset Ratio in excess of 65% may
indicate debt issues for a company. Enter the amounts, for all three periods, for the Total
Liabilities and Total Assets from your company’s balance sheet. For each period,
calculate the Debt to Equity Ratio using the following formula. Total Liabilities ÷ Total
Assets
• Discontinued Operations From time to time, a company may refocus itself and sell
operating units that no longer fit with its core business and buy other companies that do.
Companies will discontinue operations for a myriad of reasons from a need to raise cash,
political motivation, eliminate an unprofitable operation or a change in CEO. It is
something most companies do, and they do it with some frequency. The gain or loss
from the discontinued operation is posted to this account.
• Dividend Payout Ratio This ratio is used to measure the percent of the company’s
earnings being returned to the shareholders. The Dividend Payout Ratio is another
widely used measure of stock value particularly for those investors interested in stocks
with income. It allows investors to identify companies with sufficient internal growth to
possibly pay dividends in the future. A ratio between 40% and 60% would allow a
company to pay a dividend while continuing to reinvest earnings in the company. Enter
the amounts, for all three periods, for Earnings Per Share and Dividend Per Share from
your company’s Income Statement. For each period, calculate the Dividend Payout Ratio
using the following formula. Dividend Per Share ÷ Earnings Per Share
• Dividend Per Share Dividend per share means the part of a company’s earnings paid
directly to shareholders for each share of common stock. For companies with preferred
stock, the dividends for the preferred stock are identified separate of the dividends for
common stock. For some investors dividend income is very significant. Dividends
provide income to investors even when the market price for the share may decline.
• Earnings Per Share Earnings per share means the part of a company’s earnings, net of
taxes and preferred stock dividends, allotted to each share of common stock. It is a
widely used barometer to measure a company’s profitability per share of common stock.
Historically, the Earnings Per Share has played a significant role in determining the
market price for stocks. A company’s earnings can change suddenly for many reasons
including manipulation, accounting changes, and restatements. For this and many other
reasons, the earnings per share is not an absolute determinate of the market value for a
company’s shares.
• Effective Control One person or a small group of people can control a publicly listed
company with as little as 10% to 30% of the voting shares. Generally, less than 5% of
the shareholders might attend or vote during a shareholder’s meeting. One shareholder or
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a few shareholders voting 10% or more of the shares could control the company and all
of the company’s revenues and assets.
• Enron A U.S. energy-trading and utilities company that housed one of the biggest
accounting frauds in history. Enron’s executives employed accounting practices that
falsely inflated the company’s revenues, which, at the height of the scandal, made the
firm become the seventh largest corporation in the United States. Once the fraud came to
light, the company quickly unraveled and filed for Chapter 11 bankruptcy on Dec. 2,
2001.
• Extraordinary Items Significant gains and losses can be classified as extraordinary
on the income statement only when they are unusual and infrequent. In 2002, the FASB
introduced Statement no.145. It considerably reduced the criteria for classifying an item
as extraordinary.
• FASB The Financial Accounting Standards Board (FASB) is a private, not-for-profit
organization whose primary purpose is to develop generally accepted accounting
principles (GAAP) within the United States in the public’s interest.
• Financing Activities This part of the Statement of Cash Flows might typically include
cash raised by selling stock to investors and or borrowing from lenders.
• Float The total number of shares publicly owned and available for trading. The float is
calculated by subtracting restricted shares from outstanding shares.
• Franchisee The party in a franchising agreement that is purchasing the right to use a
business’s trademarks, associated brands and other proprietary knowledge in order to
open a branch. In addition to paying an annual franchising fee to the underlying
company, the franchisee must also pay a portion of its profits to the franchisor.
• Gearing Ratio This ratio is used to compare the amount of long term debt to the
shareholders’ equity. The Gearing Ratio shows how well your company’s will be able to
service, satisfy existing long term debt or acquire additional long term debt. A company
with a high Gearing Ratio is more vulnerable to competitor assaults, price reductions and
business downturns. Generally, no matter what the difficulty facing the company, it must
continue to service its debt. Companies with a low Gearing Ratio usually have sufficient
equity to manage through difficult periods. Enter the amounts, for all three periods, for
the Long Term Liabilities and Shareholders’ Equity from your company’s balance sheet.
For each period, calculate the Gearing Ratio using the following formula. Long Term
Liabilities ÷ Shareholders’ Equity
• General Administrative Expense The operating expense account in an income
statement generally includes two major categories. The first is the General
Administrative Expense. The other category is Depreciation.
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• Generally Accepted Accounting Principles (GAAP) The common set of accounting
principles, standards and procedures that companies use to compile their financial
statements. GAAP are a combination of authoritative standards (set by policy boards) and
simply the commonly accepted ways of recording and reporting accounting information.
• Great Crash of 1929 The most devastating stock market crash in the history of the
United States, when taking into consideration the full extent and duration of its fallout.
The crash signaled the beginning of the 10-year Great Depression that affected all
Western industrialized countries.
• Gross Profit Gross profit for a company is the difference between the cost of goods
sold and the net sales (Net sales – Cost of goods sold = Gross profit).
• Gross Profit Margin Ratio Gross profit margin measures the percentage of sales
revenue that is not used to pay the cost of producing the goods being sold. For example,
a gross profit margin ratio of 30 percent means 30 cents of every dollar of sales is
retained by the company, once the company accounts for its costs of manufacturing the
product. The gross profit margin should not be confused with the net profit margin,
which takes into consideration all costs incurred by the company, such as taxes.
• IFRS The International Financial Reporting Standards (IFRS) is a set of international
accounting standards stating how particular types of transactions and other events should
be reported in financial statements. IFRS are issued by the International Accounting
Standards Board.
• Income Statement A financial statement that measures a company’s financial
performance over a specific accounting period. It is also known as the profit and loss
statement, P&L statement, earnings statement, operating statement or statement of
operations. The primary purpose of the income statement is to show whether the
company made or lost money during the period being reported. Financial performance is
assessed by giving a summary of how the business incurs its revenues and expenses
through both operating and non-operating activities.
• Income Taxes Most public companies operate in many states, counties and cities.
Each locality has taxing authority and companies, may be liable to local governments for
an assortment of taxes. Additionally, federal income tax must be paid by US companies.
Many companies, like Tyson and 3M, also operate internationally and are subject to an
array of taxes levied by foreign sovereign and local governments.
• Insider Trading The buying or selling of a security by someone who has access to
material, nonpublic information about the security.
• Institutional Investors A non-bank person or organization that trades securities in
large enough share quantities or dollar amounts that they qualify for preferential
treatment and lower commissions. Institutional investors face fewer protective
regulations because it is assumed that they are more knowledgeable and better able to
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protect themselves. Some examples of institutional investors are pension funds and life
insurance companies.
• Intangible Assets Intangible assets are generally defined by what they are not. They
are not something physical such as a building, vehicle or machine tool. Intellectual
property, belonging to the company, including patents, trademarks, copyrights and
business methodologies can be categorized as intangible assets. Many companies also
include goodwill and brand recognition as intangible assets on their balance sheet.
• Interest Coverage Ratio or Debt Service Ratio This ratio is used to discover how
easily your company can pay the interest on its outstanding debt. A low Interest
Coverage Ratio can mean your company may find it difficult to pay its debt expense. An
Interest Coverage Ratio below 1 might imply a company is not producing sufficient
income to pay the interest expenses. Generally, this would indicate caution for an
investor. Enter the amounts, for all three periods, for the Profit Before Taxes and Interest
Expense from your company’s Income Statement. For each period, calculate the Interest
Coverage Ratio using the following formula. (Profit Before Taxes+ Interest Expense) ÷
Interest Expense
• Interest Expense Public companies generally have short and long term debt. The debt
could be a bond, debenture, mortgage, unsecured short term note, long term loan or other
indebtedness. Most all debt includes interest on the funds borrowed. The interest
payments are usually made periodically. Payments can be monthly, quarterly, semi-
annually and annually depending on the terms of the debt. The interest payments are
usually posted to this account on the income statement.
• Inventory The term ‘Inventory’ can mean different things for a company depending on
the company’s product or service. Generally, it means the goods a company holds in
stock, assets that are ready or will be ready for sale.
• Inventory Turn Ratio This ratio is used to measure how effectively your company
converts its inventory into cash. It shows how well your company manages its inventory
levels. If inventory turnover is too low, it may indicate the company is overstocking
inventory. It may also indicate the company is having issues selling products. The higher
the value for the Inventory Turnover Ratio, the better your company is performing. It is
also important to note different industries may have very different inventory turn ratios.
For some industries, the Inventory Turnover Ratio is not a significant as it is for other
industries. Enter the amounts, for all three periods, for the Cost of Goods Sold from your
company’s Income Statement and Inventory from the balance sheet. For each period,
calculate the Inventory Turnover Ratio using the following formula. Cost of Goods Sold
÷ Inventory
• Investing Activities Investing activities have an indirect relationship to the core,
ongoing operation of the company’s business. Investing activities include transactions
and events involving the purchase and sale of land, buildings, equipment, securities and
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other assets not generally held for resale. It also includes making and collecting of loans
to others. Included in the Statement of Cash Flow.
• Investor A person or entity who allocates capital with the expectation of a financial
return.
• Irregular Items Generally, companies will include three categories in this section.
The first is discontinued operations. Extraordinary Items usually is the second category.
The last category is often changing in accounting principle.
• Laissez-faire An economic theory from the 18th century that is strongly opposed to
any government intervention in business affairs.
• Lender Someone who makes funds available to another with the expectation that the
funds will be repaid, plus any interest and/or fees.
• Leverage Ratios These ratios measure how well your company might be able to
secure additional debt. They also indicate how well it may be able to service existing
debt. Ratios with higher values generally indicate a restrained ability to borrow additional
debt. Lenders are generally interested in these ratios. A limited ability to borrow funds
can place a burden on growth.
• Liability The chances are good, if it is something a company owes, it is a liability.
They are the obligations of the company and are the opposite of assets.
• Liquidity Ratios These ratios measure your company’s ability to pay its short-term
debt obligations. Generally, a higher the ratio of liquid assets to short-term liabilities is
better. It usually indicates a company can pay its short-term debts and still fund its
ongoing operations. A low ratio might be a warning sign.
• Long Term Investments These assets are investments your company intends to hold
for more than a year. Generally, they are investments which cannot be converted to cash
in less than one year.
• Market One of the many varieties of systems, institutions, procedures, social relations
and infrastructures whereby parties engage in exchange.
• MD&A The Management Discussion and Analysis (MD&A) is a section of a
company’s annual report in which management discusses numerous aspects of the
company, both past and present. Among other things, the MD&A provides an overview
of the previous year of operations and how the company fared in that time period.
Management will usually also touch on the upcoming year, outlining future goals and
approaches to new projects.
• Net Income The income remaining after all expenses and taxes have been deducted is
the net income. Many people call it “the bottom line” because it is typically found on the
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last line of a company’s income statement. Net income is also called after tax profit, net,
net profit and profit. It is one of the most frequently viewed items on a company’s
financial statements.
• Net Sales The amount of sales generated by a company after the deduction of returns,
allowances for damaged or missing goods and any discounts allowed. The sales number
reported on a company’s financial statements is a net sales number, reflecting these
deductions.
• Net Working Capital Turnover Ratio The company’s operations and inventory
generate sales. This ratio is used to measure how well the money your company uses to
support its operations generates sales. Generally, a higher ratio means the company is
generating more sales for each dollar spent on operations. A high turnover value is better
than a low turnover value. Working capital is the difference between current assets and
current liabilities. To calculate working capital for your company use the following
formula: Current Assets – Current Liabilities
• Non-operating Income The portion of an organization’s income that is derived from
activities not related to its core operations. Non-operating income would include such
items as dividend income, profits (and losses) from investments, gains (or losses)
incurred due to foreign exchange, asset write-downs and other non-operating revenues
and expenses.
• Noncurrent Assets These are assets not to be converted to cash within 12 months of the
balance sheet date.
• Notes to the Financial Statement Gains or losses included in a company’s financial
statements, which are infrequent and unusual in nature. These are usually explained
further in the “notes to the financial statements.” These are the result of unforeseen and
atypical events. They are usually accounted for separately, so they don’t skew the
company’s regular earnings.
• Office of Management and Budget (OMB) Federal agency that oversees the
performance of federal agencies, administers the federal budget and advises the President
on the federal budget; the largest office within the Executive Office of the President of
the United States (EOP); the Director of the OMB is a member of the President’s Cabinet.
• Operating Activity Cash Flow Transactions and events related to operating the
company’s daily normal business are included in the operating cash flow section. The
key item on a statement of cash flow is generally the net amount of cash provided or used
by operating activities.
• Operating Cash Flow Ratio Calculate the Operating Cash Flow Ratio using the
following formula. Net Cash from Operating Activity ÷ Current Liabilities
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• Operating Expense An expense incurred in carrying out an organization’s day-to-day
activities, but not directly associated with production. Operating expenses include such
things as payroll, sales commissions, employee benefits and pension contributions,
transportation and travel, amortization and depreciation, rent, repairs, and taxes. Account
located in the Income Statement.
• Operating Income Operating income calculates the difference between the Gross
Profit and the Operating Expense. This calculation shows the profit realized from the
company’s primary business operation. It is frequently referred to as the Earnings Before
Interest and Tax or “EBIT”.
• Paid-In Capital Another category of contributed capital is paid-in capital. It is the
money a company receives, above the par value, when an investor purchases stock
directly from the company.
• Price/Earnings Ratio This ratio is used to learn what investors are currently willing to
pay for the company’s earnings. The Price/Earnings Ratio is one of the most widely used
measures of stock value. It shows the relationship between the current stock price and the
company’s per share of stock. The higher the Price/Earnings Ratio, the more the market
is willing to pay for a company’s earnings. Some investors believe a high P/E indicates
an overpriced stock. This may be true, but it may also mean the market is optimistic
about the stock’s future and is willing to pay more for the stock. A low Price/Earnings
Ratio might suggest “no confidence” for the stock or it could mean the price is
undervalued and may rise in the future. Some “undervalued” stocks have become big
winners for some investors. Please note there is a strong emphasis on the word “some”.
• Profitability Ratios These ratios measure how well your company’s management is
able to control expenses to generate margins and the overall efficiency in producing
returns. Generally, the higher the ratio is the better the company’s performance.
• Property, Plant and Equipment These assets are generally the bricks and mortar of a
company. They are usually reported using the acquisition price less the accumulated
depreciation. The depreciation is spread over the “useful life” of the fixed asset. Such
assets include land, buildings, factories, furniture and equipment. Often these assets may
have a market value greater than the depreciated value appearing on the balance sheet.
• Proxy Statement A document containing the information that a company is required
by the SEC to provide to shareholders so they can make informed decisions about matters
that will be brought up at an annual shareholder meeting. The company’s annual proxy
statement will disclose the number of shares owned by the each member of the Board of
Directors. It will also identify all shareholders who own 5% or more of the common stock
and voting stock of the company.
• Proxy Vote A form of voting whereby some members of a decision-making body may
delegate their voting power to other members of the same body to vote in their absence,
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and/or to select additional representatives. A person so designated is called a “proxy” and
the person designating him or her is called a “principal.”
• Publicly Traded Company A company that has issued securities through an initial
public offering (IPO) and is traded on at least one stock exchange or in the over the
counter market. Although a small percentage of shares may be initially “floated” to the
public, the act of becoming a public company allows the market to determine the value of
the entire company through daily trading.
• Quick Ratio The quick ratio compares the company’s cash, cash equivalents and
accounts receivable to the current liabilities. The primary difference between the current
ratio and the quick ratio is the quick ratio does not include inventory and prepaid
expenses in the calculation. The company’s quick ratio should be lower than its current
ratio. It is a severe test of liquidity.
• Restricted Stock Insider holdings that are under some other kind of sales restriction.
Restricted stock must be traded in compliance with special SEC regulations. These
regulations are outlined under Section 1244 of the Internal Revenue Code.
• Retained Earnings Management may pay it out to shareholders as a cash dividend or
management may retain the profit and reinvest it in the company. The profit is posted in
the retained earnings account when the management decides to invest the profit in the
company.
• Retained Earnings Ratio This ratio is one way to measure a company’s growth rate.
Using retained earnings may not always be the best approach for private and small firms,
as tax implications may limit the retained earnings kept on the balance sheet. Dividends
paid to shareholders from earnings cannot be used to help a company grow. One way for
a company to grow is to invest the earnings in the core business for the company.
Generally, companies will retain their earnings to invest in growth opportunities, such as
buying new equipment, investing in research and development or acquisitions. Calculate
the Retained Earnings Ratio using the following formula: Retained Earnings Per Share
÷ Shareholders’ Equity per share
• Return on Assets Ratio A ratio used to compare a business’s performance among
other industry members. The ratio can be used internally by the company’s analysts, or
by potential and current investors. The ratio does not however include any future
commitments regarding assets, nor does it include the cost of replacing older ones.
Calculate the Return on Assets Ratio using the following formula. Net Income ÷ Total
Assets
• Return on Equity Ratio A method of performance measurement that was started by
the DuPont Corporation in the 1920s. With this method, assets are measured at their
gross book value rather than at net book value in order to produce a higher return on
equity (ROE). It is also known as “DuPont identity”. DuPont analysis tells us that ROE
is affected by three things: – Operating efficiency, which is measured by profit margin –
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Asset use efficiency, which is measured by total asset turnover – Financial leverage,
which is measured by the equity multiplier ROE = Profit Margin (Profit/Sales) * Total
• Return on Sales Ratio A ratio widely used to evaluate a company’s operational
efficiency. ROS is also known as a firm’s “operating profit margin”. It is calculated
using this formula: Net Income ÷ Net Sales
• Sarbanes-Oxley (SOX) An act passed by U.S. Congress in 2002 to protect investors
from the possibility of fraudulent accounting activities by corporations. The Sarbanes-
Oxley Act (SOX) mandated strict reforms to improve financial disclosures from
corporations and prevent accounting fraud. SOX was enacted in response to the
accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom
shook investor confidence in financial statements and required an overhaul of regulatory
standards.
• SEC Form 10-K The annual report on Form 10-K provides a comprehensive overview
of the company’s business and financial condition and includes audited financial
statements. Typically, the 10-K contains much more detail than the annual report. The
Form 10-K must be submitted annually to the Securities and Exchange Commission
within 60 days after the end of the fiscal year.
• Securities Act of 1933 A federal piece of legislation enacted as a result of the market
crash of 1929. The legislation had two main goals: (1) to ensure more transparency in
financial statements so investors can make informed decisions about investments, and (2)
to establish laws against misrepresentation and fraudulent activities in the securities
markets.
• Shareholder Any person, company or other institution that owns at least one share of a
company’s stock. A shareholder may also be referred to as a “shareholder”.
• Short Term Investments Negotiable instruments, investments and certificates of
deposits are considered short term investments.
• SIC Code The Standard Industrial Classification (abbreviated SIC) is a system for
classifying industries by a four-digit code.
• SOX The Sarbanes–Oxley Act of 2002 (Pub. L. 107–204, 116 Stat. 745, enacted July
30, 2002), also known as the ‘Public Company Accounting Reform and Investor
Protection Act’ (in the Senate) and ‘Corporate and Auditing Accountability and
Responsibility Act’ (in the House) and more commonly called Sarbanes–Oxley, SarBox
or SOX, is a United States federal law that set new or enhanced standards for all U.S.
public company boards, management and public accounting firms.
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• Statement of Cash Flows The true for many companies can be based on the cash flow.
The Cash Flow Statement lets you understand how much cash came into the company,
where it came from, how much was used and how it was used.
• Statement of Retained Earnings The statement of retained earnings reconciles
changes in the retained earnings accounting during a reporting period. The statement
begins with the beginning balance in the retained earnings account, and then adds or
subtracts such items as profits and dividend payments to arrive at the ending retained
earnings balance.
• Statement of Shareholders Equity This report tells a shareholder the value of the
stock. It is not the price of the shares as traded on public exchange. Rather, it includes
capital stock, paid-in capital, retained earnings, treasury stock, unrealized loss on long-
term investments, and foreign currency translation gains and losses.
• Stock Exchange A form of exchange which provides services for stockbrokers and
traders to trade stocks, bonds, and other securities. Stock exchanges also provide
facilities for issue and redemption of securities and other financial instruments, and
capital events including the payment of income and dividends. Securities traded on a
stock exchange include shares issued by companies, unit trusts, derivatives, pooled
investment products and bonds.
• Stock Market The market in which shares of publicly held companies are issued and
traded either through exchanges or over-the-counter markets.
• Stock Option A privilege, sold by one party to another, that gives the buyer the right,
but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a
certain period or on a specific date.
• Shareholder’s Equity The portion of the balance sheet that represents the capital
received from investors in exchange for stock (paid-in capital), donated capital and
retained earnings. Shareholders’ equity represents the equity stake currently held on the
books by a firm’s equity investors. It is calculated either as a firm’s total assets minus its
total liabilities, or as share capital plus retained earnings minus treasury shares:
Shareholders’ Equity Also known as “shareholders’ equity”.
• Shareholders See “Shareholder”.
• Statement of Cash Flow One of the quarterly financial reports any publicly traded
company is required to disclose to the SEC and the public. The document provides
aggregate data regarding all cash inflows a company receives from both its ongoing
operations and external investment sources, as well as all cash outflows that pay for
business activities and investments during a given quarter.
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• Treasury Stock When a company buys back its shares it is called Treasury Stock. The
company may buy back the shares for a variety of reasons. Often, the stock is purchased
when management believes the publicly traded price for the stock is undervalued.
• Turnover Ratios These ratios measure the efficiency your company applies to the use
of certain assets and resources. Generally, most analysis focuses on the activity
associated with inventory and accounts receivable. Generally, the higher the ratio is the
better the company’s performance.
• Union An organization of workers who have banded together to achieve common goals
such as protecting the integrity of its trade, achieving higher pay, increasing the number
of employees an employer hires, and better working conditions. The trade union, through
its leadership, bargains with the employer on behalf of union members (rank and file
members) and negotiates labor contracts (collective bargaining) with employers.
• Vendor A business that sells a particular type of product or service. One that sells or
vends.
• Working Capital Balance A high working capital balance is necessary if your
company might have difficulty borrowing on short notice. A low working capital balance
might mean your company may have difficulty meeting its short-term obligations.
• WorldCom Formerly known as MCI-WorldCom, subsequently known as WorldCom,
this U.S.-based telecommunications company was at one time the second-largest long
distance phone company in the United States. It is perhaps best known for a massive
accounting scandal that led to the company filing for bankruptcy protection in 2002.
WorldCom executives effectively fudged the company’s accounting numbers, inflating
the company’s assets by around $12 billion dollars. The swift bankruptcy that followed
led to massive losses for investors.
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Videos
Video 1 Stock market crash of 1929 ……………………………………………………………………. 11
Video 2 Stock market crash of 2008 …………………………………………………………………….. 11
Video 3 EDGAR tutorial ……………………………………………………………………………………. 12
Video 4 GAAP tutorial ……………………………………………………………………………………… 12
Video 5 United Airlines employees protect shareholder meeting ……………………………. 15
Video 6 ETQ Corp. shareholders thrown out of meeting ………………………………………. 15
Video 7 Community leaders protest Chevron shareholder meeting ………………………… 16
Video 8 Coca-Cola Marketing Strategy 2019 ……………………………………………………….. 17
Video 9 Marriott Hotel marketing 2019 ………………………………………………………………. 18
Video 10 Intercontinental Hotel marketing 2019 …………………………………………………… 18
Video 11 Take a look inside Wall Street ……………………………………………………………… 21
Video 12 Taste of Sam Adams Beer ……………………………………………………………………. 26
Video 13 NACIS tutorial …………………………………………………………………………………… 30
Video 14 Indirect competition ……………………………………………………………………………. 34
Video 15 Lee Iacocca reinventing Chrysler in 1992 ……………………………………………… 37
Page 141
Video 16 Lou Gerstner speaks about IBM …………………………………………………………… 37
Video 17 Mark Zuckerberg interview 2019………………………………………………………….. 38
Video 18 Larry Page speaks about Google ………………………………………………………….. 38
Video 19 Howard Schultz speaks about Starbucks ……………………………………………….. 39
Video 20 Steve Jobs on core values …………………………………………………………………….. 41
Video 21 Walmart employee protest wages …………………………………………………………. 41
Video 22 Steve Jobs presents first iPhone in 2007 ………………………………………………… 46
Video 23 Walmart early years. …………………………………………………………………………… 59
Video 24 Enron CEO arrested for fraud ………………………………………………………………. 59
Video 25 Inside the WorldCom scam ………………………………………………………………….. 59
Video 26 Senator Paul Sarbanes discusses the Sarbanes-Oxley Act. ………………………… 60
Video 27 Auditors’ Report…………………………………………………………………………………. 60
Video 28 A beginner’s guide to Balance Sheets ……………………………………………………. 64
Video 29 Calculating the debt to equity ratio ………………………………………………………. 77
Video 30 Legacy of William Zeckendorf Sr…………………………………………………………. 78
Video 31 Overview of the Income Statement ……………………………………………………….. 78
Video 32 Overview of the Cash Flows Statement …………………………………………………. 92
Video 33 Shareholders’ Equity …………………………………………………………………………… 93
Page 142
Video 34 Types of company shares …………………………………………………………………….. 93
Video 35 Types of common stock ………………………………………………………………………. 96
Video 36 Notes to the financial statement ……………………………………………………………. 98
Video 37 Liquidity ratios …………………………………………………………………………………. 102
Video 38 Acid test ratio …………………………………………………………………………………… 103
Video 39 Profitability ratios……………………………………………………………………………… 105
Video 40 Inventory ratios ………………………………………………………………………………… 109
Video 41 Leverage ratios …………………………………………………………………………………. 113
Video 42 Gearing ratio…………………………………………………………………………………….. 115
Video 43 Price to earnings ratio………………………………………………………………………… 118
Video 44 Altman Z Score ………………………………………………………………………………… 121
Video 45 Professor Ed Altman interview ………………………………………………………….. 122
FrontCover_Final elit 2017
1: Front Cover
Page 10 of 41
Your Name Here
Your Company Name Here
Annual Report Workbook
Getting under the hood of an Annual Report
and knowing what’s inside
by Donald Bittar
Introduction
You can use this workbook for analyzing many companies and saving your analysis for each one, like many professionals. Just like them, over time, you can compare a company’s actual performance to your analysis and predictions. Saving your analysis sheets can help sharpen you analytical skills.
The questions in the workbook are numbered the same way as they are in the book, ‘Getting Under the Hood of an Annual Report’. As there are no questions in the first chapter of the book, the workbook starts with Chapter 2. It will make it easier for you to relate the questions in the workbook to those in the book.
Your input to the workbook will appear in a dark green font while the questions appear in blue. The different font colors can make it easier for you to see your work.
You’ll need to do some number crunching to complete your annual report analysis. The Big Calculating Tool, located on your CD, can save you a great deal of time and make the number crunching nearly painless. Every ratio and calculation for the book is included in the Big Calculating Tool. You’ll have more time for analysis if you use the Big Calculating Tool.
Table of Contents
Questions for Chapter 2
4
Question 2.0 – What do you want to learn about company and why?
4
Question 2.1 – Fundamental Information Set For Your Company
4
Question 2.2 – The Marketplace Context
5
Question 2.3 – Challenges and Success for Your Company
6
Questions for Chapter 3
8
Question 3.1 – What is Management saying about your company?
8
Question 3.2 – What did the Chairman say?
9
Question 3.3 – Internal Controls and Auditors
10
Questions for Chapter 4
11
Question 4.0 – What is your company’s fiscal year
11
Question 4.1 – Current Assets
11
Question 4.2 – Property, Plant and Equipment
11
Question 4.3 – How good is the Goodwill
12
Question 4.4 – Current Liabilities
13
Question 4.5 – How much stock is there and who owns it?
13
Question 4.6 – Who owns the stock?
13
Question 4.7 – First look at the company’s strength
14
Question 4.8 – Significant changes in the balance sheet
15
Question 4.9 – Significant changes in the cash account
15
Question 4.10 – Debt to equity and the competition
15
Question 4.11 – ‘Income statement’. What’s in a name?
16
Question 4.12 – How does your company report the core business?
16
Question 4.13 – How does your company describe its business income?
17
Question 4.14 – Irregular items. Good or Bad?
17
Question 4.15 – The big questions. Are they makin’ money? Are they lookin’ good?
18
Question 4.16 – Which trend is important and why?
19
Question 4.17 – How strong is your company’s cash position?
19
Question 4.18 – How well can your company pay its bills?
20
Question 4.19 – How leveraged is your company?
21
Question 4.20 – How well does your company invest in its future?
22
Question 4.21 – Capital and Treasury Stock
22
Question 4.21 –Basic information about your company not found on the financial statement?
23
Question 4.22 –Other significant information about your company not found on the financial statement?
23
Questions for Chapter 5
25
Question 5.1 – Working Capital Balance
25
Question 5.2 – Acid Test or Quick Ratio
25
Question 5.3 – Current Ratio
26
Question 5.4 – Cash Ratio
27
Question 5.5 – Return on Sales Ratio
28
Question 5.6 – Return on Equity Ratio
28
Question 5.7 – Return on Assets Ratio
29
Question 5.8 – Asset Turn Ratio
30
Question 5.9 – Gross Profit Margin Ratio
30
Question 5.10 – Inventory Turnover Ratio
31
Question 5.11 – Days in Inventory Ratio
32
Question 5.12 – Accounts Receivable Turnover Ratio
33
Question 5.13 – Average Collection Period
33
Question 5.14 – Accounts Payable Turnover Ratio
34
Question 5.15 – Net Working Capital Turnover Ratio
35
Question 5.16 – Debt to Equity Ratio
36
Question 5.17 – Debt to Asset Ratio
37
Question 5.18 – Gearing Ratio or Long Term Debt to Shareholders’ Equity Ratio
37
Question 5.19 – Interest Coverage Ratio or Debt Service Ratio
38
Question 5.20 –Earnings per Share
39
Question 5.21 – Price/Earnings Ratio
40
Question 5.22 –Dividend per Share
40
Question 5.23 – Dividend Payout Ratio
41
Questions for Chapter 6
43
Question 6.0 – Calculate the Altman Z-Score
43
Question 6.1 – What did you learn about your company
43
Question 6.2 – Would you buy, sell, hold or stay away
43
Questions for Chapter 2
Question 2.0 – What do you want to learn about company and why?
2.0 – What You Want To Learn About the Company and Why?
Priority
What do you want to learn?
Why do you want to learn it?
A
B
C
D
Question 2.1 – Fundamental Information Set For Your Company
The answer to the following questions may be found in either the Annual Report to Stockholders or on the SEC Form 10-K. It may also be necessary for you to use other sources. To fully answer the questions, you must identify the source for your information and also include the answer. If the question is not applicable to your company, place “NA” as the answer. To identify the source use “AR” for Annual Report to Stockholders and “10K” for the SEC Form 10-K. If something else, use “Other” and include the identification at the end of your answer.
2.1 – Fundamental Information Set For Your Company
Question
Source
Answer
A
What is the official company name?
B
What is Company headquarters address?
C
What is the Executive Office telephone number?
D
What is the Investor Relations telephone number?
E
What is the official company website?
F
What is the fiscal year ending date?
G
State of incorporation
H
What government agency, other than the SEC, has a significant impact on your Company?
I
What is the trading symbol for your Company’s common stock?
J
Which stock exchange lists the common stock for your Company?
K
What is the name of the stock transfer agent for your Company?
L
What is the Par Value for the common shares of your Company?
M
What is the number of common shares outstanding?
N
In the past 3 years what is the highest trading price for the common stock for your company.
O
In the past 3 years what is the lowest trading price for the common stock for your company?
P
How many members are on the Board of Directors?
Q
How many Board Members are present or past employees of the Company?
R
How many are Board Members are from outside your Company?
S
Which companies or institutions do the outside Board Members represent?
T
How many subsidiaries are directly or indirectly controlled by your Company?
U
How many subsidiaries have jurisdictions outside the United States?
Question 2.2 – The Marketplace Context
If analyzing a company’s performance were only about the numbers, predicting the performance of a company would be easy. Performance, success and failure are outcomes that are affected by the marketplace. Your company does not exist inside a vacuum. It lives alongside other companies actively struggling to protect existing customer relationships and working to create new customers. Often companies will compete for the same customers. For some companies the competitors are easily identifiable. Your company’s SIC code can help you identify its competitors. They will have the same SIC code. Other companies compete indirectly with alternative products or technologies making it difficult to identify competitors. Consider FedEx with both direct and indirect competitors.
The answer to the following questions may be found in either the Annual Report to Stockholders or on the SEC Form 10-K. It may also be necessary for you to use other sources. To fully answer the questions, you must identify the source for your information and also include the answer. If the question is not applicable to your company, place “NA” as the answer. To identify the source use “AR” for Annual Report to Stockholders and “10K” for the SEC Form 10-K. If something else, use “Other” and include the identification at the end of your answer.
2.2 – The Marketplace Context
Question
Source
Answer
A
What is the Standard Industrial Classification and the SIC Code for your company? List all that may apply?
B
What is the company’s primary product, product group or business segment?
C
Is there a single customer that accounts for more than 10% of total net sales?
D
What is the major customer profile for your company?
E
Is there a competitor larger than your Company?
F
Which company is the most significant competitor for your Company?
G
What is the country of origin for this competitor?
H
During the past 2 years, has your Company launched a significant new product or service? If yes, what is the product or service?
I
During the past 2 years, has your company entered a new market? If yes, what is the market and where is located?
J
During the past 2 years, has your Company launched a new technology? If yes, what is it?
K
What are the technological issues for your Company? How are they described?
Question 2.3 – Challenges and Success for Your Company
Review the Annual Report for Stockholders and the Form 10-K for your company. Using the above list of Marketplace Issues, identify the marketplace issues affecting your company. Your company is large enough to be newsworthy. Most likely, the issue you identified in the Annual Report for Stockholders or the Form 10-K might be reported elsewhere. With research apart from the Annual Report for Stockholders and the Form 10-K you may be able to find additional information about the issue. There are several print media research sources available in the library:
1. Wall Street Journal
2. New York Times
3. Barron’s
4. Moody’s Complete Corporate Index
5. Standard and Poor’s Industry Guide
The Internet makes a vast universe of material available to you. It is fast and convenient. The chances are remote that you will not be able to discover sufficient information to satisfy your needs. Use your favorite search tool and start digging.
Your company is a good place to start. Their website may have relevant press releases about the issue. Some of the officers may have made speeches or written articles about it.
Describe the significant marketplace issues identified in the Annual Report for Stockholders and the Form 10-K for your company. For each issue:
1. Include the marketplace category.
2. The description of the issue as it appeared in the Annual Report for Stockholders and the Form 10-K for your company.
3. Your interpretation of its significance to the company, what the importance is to the company and if management is capable of creating a positive outcome.
2.3 – Challenges and Success for Your Company
Marketplace Issue
Description of the Issue
Significance
A
B
C
D
Questions for Chapter 3
Question 3.1 – What is Management saying about your company?
When reading the Management’s Discussion and Analysis of Operations and Financial Condition (MD&A) asking each of the following questions will help to identify a significant fact that will help you understand your annual report. Pick an item reported in the MD&A which you believe to be significant and ask yourself:
· What is it?
· When did it occur?
· Where did the action take place?
· Who was involved?
· Why did this happen?
· How did it happen
Answer as much of the five Ws and one H as you can from the annual report. Next, use the internet and other printed media sources to get additional information about the item. From the combined sources you should be able gather a reasonably complete assessment of the item.
Identify the source of your outside material.
Use the following template to complete your answers.
3.1.1 – What is Management saying about your company?
Copy the item from the MD&A and paste it below.
3.1.2
Five Ws and One H
Form 10-K MD&A
Outside Source Material
Paste information from the 10K in this column.
Paste information from outside sources in this column. Include the source link.
A
In your own words describe the item?
B
When did it occur?
C
Where did the action take place?
D
Who was involved?
E
Why did this happen?
F
How did it happen?
G
In your opinion, what do you believe is the importance of this item to your company? How will it impact the company?
Question 3.2 – What did the Chairman say?
Read the Chairman’s Message in the Annual Report to Stockholders for your company. You might also find the Chairman’s message in the company’s annual proxy statement. Identify the issues and events outlined in the Message. Highlighting the text of the issues and events can help assess their significance and prioritize them.
3.2.1 – What did the Chairman say?
A
In your opinion, what is the most significant issue in the Message?
B
Quote the Chairman’s description of the issue?
C
What is the significance of the issue for the company?
D
Did the Message include a solution for the issue? If yes, what was it?
E
Did the solution instill confidence in you?
F
If yes, why? If no, why?
The Chairman’s Message is read by a wide and diverse constituency. Select a group of constituents excluding stockholders, investors and financial analyst. Write your opinion of how you believe they will react to the Chairman’s message. Select one from the following constituents.
Creditors
Regulatory agencies
Competitors
Employees
Local and state governments
Suppliers
Salespeople
Foreign governments
Vendors
Franchisees
Environmental activists
Distributors
Unions
Consumer advocates
Customers
Human rights advocates
Press and media
Regulatory agencies
3.2.2 – What did the Chairman say?
A
Constituent’s name
B
With respect to the company, is the constituency supportive, neutral or adversarial?
C
What issue in the Chairman’s message will cause the greatest reaction?
D
How do you believe the constituency will react to the issue?
E
Why do you believe they will react that way?
F
Will their reaction create a positive or negative impact on the Company? What will be the impact and why?
Question 3.3 – Internal Controls and Auditors
Information about the company’s compliance with SOX can be found in SEC Form 10-K. The section called Controls and Procedures includes information about how the company is complying with the SOX reporting requirements. Generally preceding the section on Controls and Procedures is the Report of Independent Registered Public Accounting Firm. It will also contain information about internal controls and auditors. Review these sections of your company’s SEC Form 10-K and answer the following questions.
3.3 – Internal Controls and Auditors
A
Who in your company is responsible for the internal disclosure controls and procedures?
B
Who are members of the Audit Committee?
C
What is the name of the independent auditor for your company?
D
What was the auditor’s opinion of the consolidated financial statement?
E
What was the auditor’s opinion of the internal disclosure controls and procedures?
Questions for Chapter 4
Question 4.0 – What is your company’s fiscal year
4.0 – What is your company’s fiscal year?
A
When does your company’s fiscal year end?
B
In your opinion, why did your company select this date to end its fiscal year?
C
Do competitors use the same fiscal year as your company?
Question 4.1 – Current Assets
Some companies have current assets other than Cash, Short Term Investments, Accounts Receivables and Inventories. Locate the Current Asset section of the Balance Sheet for your company and review the current asset categories.
What categories of current assets, other than Cash, Short Term Investments, Accounts Receivables and Inventories are reported by your company? What is their significance to the company? Mark your answer “NA” if your company does not report current asset categories other than Cash, Short Term Investments, Accounts Receivables and Inventories.
4.1 – Current Assets
Current Asset Category
Significance
A
B
C
D
Question 4.2 – Property, Plant and Equipment
Some companies have categories for Property, Plant and Equipment other than land, buildings, factories, furniture and equipment. What categories of Property Plant and Equipment other than land, buildings, factories, furniture and equipment are reported by your company? What is it their significance to the company? Mark your answer “NA” if your company does not report categories of Property Plant and Equipment other than land, buildings, factories, furniture and equipment.
4.2 – Property, Plant and Equipment?
Property Plant and Equipment Category
Significance
A
B
C
D
Question 4.3 – How good is the Goodwill
Goodwill is a balance sheet item reported by many companies. The details of the Goodwill are generally described in the Notes to the Financial Statement. Goodwill should reflect the strategic future value of an acquisition. Mark your answer “NA” if your company does not report Goodwill.
4.3 – How good is the Goodwill?
A
Does your company report Goodwill?
B
What is the value of the Goodwill?
C
What is the ratio of Goodwill to Total Assets (Goodwill Total Assets)?
D
In your opinion why is the ratio of Goodwill to Total Assets significant or insignificant?
E
What was the source of the Goodwill?
F
In your opinion why was the acquisition justified or not justified?
Question 4.4 – Current Liabilities
Some companies have current liabilities other than Accounts Payable, Accrued Salaries and Wages and Accrued Income Tax. Locate the Current Liabilities section of the Balance Sheet for your company and review the current liability categories.
What categories of current liabilities other than Accounts Payable, Accrued Salaries and Wages and Accrued Income Tax are reported by your company? What is it their significance to the company? Mark your answer “NA” if your company does not report current liability categories other than Accounts Payable, Accrued Salaries and Wages and Accrued Income Tax.
4.4 – Current Liabilities
Current Liability Category
Significance
A
B
C
D
Question 4.5 – How much stock is there and who owns it?
The equity structure is a significant aspect of a public company. It can have a dramatic impact on stock price movement and appreciation. Review the SEC Form 10-K and Annual Report to Stockholders and answer the following questions.
4.5 – How much stock is there and who owns it?
A
What is the par value of the common stock?
B
What is the number of shares outstanding?
C
What is the current listed market price for the common stock?
D
What is the number of common shares authorized?
E
What is the number of treasury shares?
Question 4.6 – Who owns the stock?
Knowing who owns large blocks of stock can be useful information when assessing the investment value of a company. The percent ownership of a company will determine the amount of control a shareholder has over the company. In a democratic election, each citizen has only one vote. In a corporate election, each shareholder gets one vote for each share of stock the shareholder owns. A shareholder with 1million share gets 1million votes while a shareholder with 10 shares gets only 10 votes. In a company with 3million shares outstanding, the shareholder with 1million shares has much more influence and power than the shareholder with 10 shares.
Proxy Statement
The company’s annual proxy statement will disclose the number of shares owned by the each member of the Board of Directors. It will also identify all shareholders who own 5% or more of the common stock and voting stock of the company. The annual proxy statement must be filed with the Securities Exchange Commission using Form DEF 14a, the definitive annual proxy statement.
4.6 – Who owns the stock?
A
How many shares are held by Officers and Directors? What does this tell you?
B
Who is the largest stockholder? What does this tell you about the company?
C
What other classes of stock are outstanding?
Question 4.7 – First look at the company’s strength
The balance sheet is a snapshot of the company financial strength. Endurance and strength are important when attempting to assess an athlete’s ability and it is the same for a public company. The first place to look for a company’s endurance and strength are the current and previous year balance sheets.
Calculate the percent increase or decrease in each of the following balance sheet accounts. Place the percentage in parenthesis if it is negative.
4.7 – First look at the company’s strength
Current Year
Previous Year
Percent Change
A
Cash and cash equivalents
B
Accounts Receivable
C
Inventory
D
Property, plant & equipment
E
Accounts Payable
F
Accrued Salaries
G
Accrued Income Tax
H
Long term debt
I
Common Stock
J
Treasury Stock
K
Retained Earnings
Question 4.8 – Significant changes in the balance sheet
In your opinion, what were the two most significant changes in the company’s balance sheet between the current year and the previous year? What were the two balance sheet accounts? Why do you believe they are significant?
4.8 – Significant changes in the balance sheet
Balance Sheet Account
Why the change was significant?
A
B
Question 4.9 – Significant changes in the cash account
Cash is an important part of a business. Some people say, “Cash is king.” Describe the change in the Cash and Cash Equivalent account between the current year and the previous year. In your opinion why was it or was it not significant?
4.9 – Significant changes in the cash account
Change in the account
Why the change was significant?
Question 4.10 – Debt to equity and the competition
The debt load for a company may or may not be a burden. It can become a competitive detriment when the debt service it too large or when the company’s ability to borrow is too retrained. It could also create vulnerability if the company’s chief competitor has the borrowing strength to “buy market share.” What is the current ratio of total debt to total stockholder’s equity for your company’s most significant competitor? What is the current ratio of total debt to total stockholder’s equity for your company? Has the ratio changed between the current year and the previous year for your company? Why or why not was the change in the ratio significant?
4.10 – Debt to equity and the competition
A
What is the current ratio of total debt to total stockholder’s equity for your company’s most significant competitor?
B
What is the current ratio of total debt to total stockholder’s equity for your company?
C
Has the ratio changed between the current year and the previous year for your company?
D
Why or why not was the change in the ratio significant?
Question 4.11 – ‘Income statement’. What’s in a name?
The income statement is a report of the company’s revenue and expenses. Companies have been using the report for almost a hundred years. Over the years, accountants have adopted different names for the income statement. What name does your company use for the income statement? In your opinion why do they use it instead of ‘income statement’?
4.11 – ‘Income statement’. What’s in a name?
A
What name does your company use for the ‘income statement’?
B
In your opinion, why do they use it?
Question 4.12 – How does your company report the core business?
Often, a company will use terms closely related to their core business when describing the line items in the operational section of the income statement. Some standard descriptions for the line items in the operational section of the income statement are:
· net sales
· cost of goods sold
· gross profit
· general administrative expense
· operating income
How does your company describe the items in its operating section of the income statement? Does the company use descriptions other than net sales, cost of goods sold, gross profit, general administrative expense and operating income? Why do you believe they use them? What does it tell you about the core business for the company? Mark your answer “NA” if your company did not unique operating section descriptions.
4.12 – How does your company report the core business?
Item descriptions
In your opinion, why is it used?
A
B
C
D
E
F
What does it tell you about the core business for the company?
Question 4.13 – How does your company describe its business income?
The way a company reports its income can help to better understand how the company prioritizes its revenue streams and how it perceives its core business. Does your company report revenues by business segment? What segments are individually identified? In your opinion, does the most significant business appear first? What is the most significant business segment and why? Mark your answer “NA” if your company did not report revenue by business segment.
4.13 – How does your company describe its business income?
Revenue segment descriptions
Identify the most significant segment and explain why it is the most significant.
A
B
C
D
E
Question 4.14 – Irregular items. Good or Bad?
While the term “irregular” is not intended as a value judgment, these items can have a positive or negative impact on the company. Review the income statement. Select the one irregular item on the income statement or in the notes section you believe is the most significant. Mark your answer “NA” if your company did not report an irregular item.
4.14 – Irregular items. Good or Bad?
A
How many irregular items were reported individually on the income statement?
B
Describe the irregular item you believe is most significant? Use the description as it appears on the income statement or in the notes.
C
What was the dollar value of the item?
D
Was the item reported individually as a separate line item on the income statement or in the notes section? In your opinion, why was it reported in the notes or as a line item?
E
Did the item have a positive, negative or neutral impact on the company?
F
In your opinion, why does the item have a positive, negative or neutral impact on the company?
G
In your opinion, will the impact be short term, ongoing or long term. Why?
Question 4.15 – The big questions. Are they makin’ money? Are they lookin’ good?
The answer to Benny’s question “Are they makin’ money?” cannot always be answered with a “yes” or a “no”. Whether your company is “lookin’ good” may be difficult to answered with a “yes” or a “no”. Understanding the income and expense trends will generally reveal enough information to answer “the big questions”. Review the three year period reported in your company’s income statement. Describe the trend for each of the major accounts on your company’s income statement. Describe the trend direction. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant? Your company may have different account descriptions and additional significant accounts. Modify the accounts to fit your company’s income statement. Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year.
Question 4.15 – The big questions. Are they makin’ money? Are they lookin’ good?
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net Sales
B
Cost of Goods Sold
C
Gross Profit
D
Operating Expense
E
Operating Income (loss)
F
Non-operating income (loss)
G
Income Tax
H
Net Income
I
J
K
L
M
Question 4.16 – Which trend is important and why?
The account with largest declining or increasing trend is not always the most significant trend on a company’s income statement. Of the trends you identified in the previous question, which account, in your opinion, has the most significant trend for your company? Why do you believe it to be the most significant? Trends generally do not remain constant forever. What might reverse the significant trend and how might the reversal affect your company?
4.16 – Which trend is important and why?
A
What account has the most significant trend for your company?
B
Why do you believe it is the most significant trend?
C
What might reverse this trend and how would the reversal impact the company?
Question 4.17 – How strong is your company’s cash position?
Enter the amounts for each cash flow account from your company’s Statement of Cash Flow.
Review the three year period reported in your company’s Statement of Cash Flow. Describe the trend for each of the major accounts. Describe the trend direction. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant? Your company may have different account descriptions and additional significant accounts. Modify the accounts to fit your company’s Statement of Cash Flow. Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year.
Question 4.17 – How strong is your company’s cash position?
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net cash from operating activity
B
Net cash from investing activity
C
Net cash from financing activity
D
Net increase (decrease) in cash and cash equivalents
E
Cash and cash equivalents at beginning of year
F
Cash and cash equivalents at end of year
Question 4.18 – How well can your company pay its bills?
Enter the amounts, for all three periods, for the Net Cash from Operating Activity account from your company’s Statement of Cash Flow. Enter the amounts, for all three periods, for the Current Liabilities from your company’s Balance Sheet. For each period, calculate the Operating Cash Flow Ratio using the following formula.
Net Cash from Operating Activity ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend for each of the major accounts. Describe the trend direction. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Question 4.18 – How well can your company pay its bills
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net cash from operating activity
B
Current Liabilities
C
Operating Cash Flow Ratio
The operating cash flow ratio can gauge a company’s liquidity in the short term. Using cash flow as opposed to income is sometimes a better indication of liquidity simply because, as we know, cash is how bills are normally paid off. If the operating cash flow ratio is less than one, it means that the company has generated less cash over the year than it needs to pay off short term liabilities as at the year end. This may signal a need to raise money to meet liabilities.
Question 4.19 – How leveraged is your company?
Enter the amounts, for all three periods, for the Net Cash from Operating Activity account from your company’s Statement of Cash Flow. Enter the amounts, for all three periods, for the Interest Expense from your company’s Income Statement. For each period, calculate the Cash Interest Coverage Ratio using the following formula.
Net Cash from Operating Activity ÷ Income Expense
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend for each of the major accounts. Describe the trend direction. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Question 4.19 – How leveraged is your company?
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net cash from operating activity
B
Interest Expense
C
Cash Interest Coverage Ratio
The Cash Interest Coverage Ratio is an indicator of how well your company will be able to make the interest payments on its entire debt load. A highly leveraged company will have a low ratio, and a company with a strong financial position will have a high ratio. Any company with a cash interest ratio less than 1.0 is in risk of potential default. The company must raise cash outside its core business to make its current interest payments. A ratio of 1.5 is generally considered the bare minimum level of comfort for any company in any industry.
Interest coverage is the equivalent of a person taking the combined interest expense from their mortgage, credit cards, automobile loans and education loans and calculating the number of times they can pay it with their annual pre-tax income. For bondholders, the Cash Interest Coverage Ratio might act as a safety gauge. It might give the bondholder a sense of how far a company’s earnings can fall before the company will start defaulting on its bond payments. For stockholders, the Cash Interest Coverage Ratio is important because it gives a clear picture of the short-term financial health of a business.
Question 4.20 – How well does your company invest in its future?
Enter the amounts, for all three periods, for the Retained Earnings per share and the Stockholders’ Equity per share from your company’s Statement of Stockholders’ Equity. For each period, calculate the Retained Earnings Ratio using the following formula.
Retained Earnings Per Share ÷ Stockholders’ Equity per share
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend for each of the major accounts. Describe the trend direction. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Dividends paid to stockholders from earnings cannot be used to help the company grow. One way for the company to grow is to invest the earnings in the core business for the company. Generally, companies will retain their earnings to invest in growth opportunities, such as buying new equipment, investing in research and development or acquisitions.
Last, explain why your company is or is not investing adequately in its future.
Question 4.20 – How well does your company invest in its future?
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Retained Earnings per share
B
Stockholders’ Equity per share
C
Retained Earnings Ratio
D
Is your company investing adequately in its future and why?
Question 4.21 – Capital and Treasury Stock
Enter the amounts, for all three periods, for number of shares outstanding for common stock and preferred stock outstanding and treasury stock. List the addition ‘classes’ of capital stock which you company may have. Enter the amounts in millions of shares from the SEC Form 10K, for the current year, the previous year and the next previous year. Enter “NA” if your company has no preferred stock or treasury stock. Describe the trend for each of the major accounts. Describe the trend direction. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Question 4.21 – Capital and Treasury Stock
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Common stock
B
Preferred stock
C
Treasury stock
D
E
F
Question 4.21 –Basic information about your company not found on the financial statement?
How is information about the following items disclosed by your company in the Notes to the Financial Statement? Generally, this information can be found in Note 1. The titles may not be identical to the title in the question. Enter “NA” if your company has no notes for a question.
Question 4.21 –Basic information about your company not found on the financial statement?
A
Description of Business
B
Consolidation
C
Foreign Currency
D
Cash and Cash Equivalents
E
Inventories
Question 4.22 –Other significant information about your company not found on the financial statement?
How is information about the following items disclosed by your company in the Notes to the Financial Statement? The titles may not be identical to the title in the question. Enter the information disclosed about each of the items in the Notes for your company. Additionally, enter the note number in which the information was disclosed. Last, explain why you believe this disclosure is or is not significant. Enter “NA” if your company has no notes for a question.
Question 4.22 –Other information about your company not found on the financial statement?
Accounts
Note #
Disclosure
Importance
A
Discontinued Operations
B
Related Parties
C
Contingencies
Questions for Chapter 5
Question 5.1 – Working Capital Balance
The working capital balance compares current assets to current liabilities. It can also demonstrate the amount of liquid reserve the company has available to handle contingencies. A high working capital balance is necessary if your company might have difficulty borrowing on short notice. A low working capital balance might mean your company may have difficulty meeting its short-term obligations.
Enter the amounts, for all three periods, for the Current Assets and the Current Liabilities from your company’s Balance Sheet. For each period, calculate the Working Capital Balance using the following formula.
Current Assets – Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Working Capital Balance. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Working Capital Balance for your company is or is not adequate for its future.
Question 5.1 – Working Capital Balance
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Current Assets
B
Current Liabilities
C
Working Capital Balance
D
Why is or is not the Working Capital Balance adequate for your company?
Question 5.2 – Acid Test or Quick Ratio
This ratio will help you measure the degree of liquidity for your company. The quick ratio compares the company’s cash, cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. The company’s quick ratio should be lower than its current ratio. It is a severe test of liquidity.
Enter the amounts, for all three periods, for the Cash, Accounts Receivable, Short-term investments and the Current Liabilities from your company’s Balance Sheet. For each period, calculate the Acid Test Ratio using the following formula.
(Cash + Accounts Receivable + Short-term Investments) ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Acid Test Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Acid Test Ratio for your company is or is not adequate for its future.
Question 5.2 – Acid Test or Quick Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Cash
B
Accounts Receivable
Short term investments
Current Liabilities
C
Acid Test Ratio
D
Why is or is not the Acid Test Ratio adequate for your company?
E
Acid Test trend Description
Question 5.3 – Current Ratio
This is another ratio to help you measure the degree of liquidity for your company. The Current Ratio compares the company’s current assets to its current liabilities.
Enter the amounts, for all three periods, for the Current Assets and the Current Liabilities from your company’s Balance Sheet. For each period, calculate the Current Ratio using the following formula.
Current Assets ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Current Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Current Ratio for your company is or is not adequate for its future.
Question 5.3 – Current Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Current Assets
B
Current Liabilities
C
Current Ratio
D
Why is or is not the Current Ratio adequate for your company?
E
Current Ratio trend description
Question 5.4 – Cash Ratio
This is ratio to help you measure the degree of short term liquidity for your company. The Cash Ratio compares the company’s cash to its current liabilities. The ratio is particularly useful if the company’s receivables and its inventory are pledged or if there may be liquidity problems with inventory and receivables.
Enter the amounts, for all three periods, for the Cash and the Current Liabilities from your company’s Balance Sheet. For each period, calculate the Cash Ratio using the following formula.
Cash ÷ Current Liabilities
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Cash Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Cash Ratio for your company is or is not adequate for its future.
Question 5.4 – Cash Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Cash
B
Current Liabilities
C
Cash Ratio
D
Why is or is not the Cash Ratio adequate for your company?
E
Cash Ratio trend description
Question 5.5 – Return on Sales Ratio
This ratio will help you measure the net income generated by each dollar of sales. It is an effective gauge for determining the rate of profit returned on sales. The Return on Sales Ratio can be useful for estimating how well the company can handle price wars, sales declines and rising costs.
Enter the amounts, for all three periods, for the Net Income and the Net Sales from your company’s Income Statement. For each period, calculate the Return on Sales Ratio using the following formula.
Net Income ÷ Net Sales
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Return on Sales Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Return on Sales Ratio for your company is or is not adequate for its future.
Question 5.5 – Return on Sales Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net Income
B
Net Sales
C
Return on Sales Ratio
D
Why is or is not the Return on Sales Ratio adequate for your company?
Question 5.6 – Return on Equity Ratio
This ratio is widely used by many investors. It is an effective measure for the income earned on the shareholder’s investment in the business. The Return on Equity Ratio can be useful for making a value judgment on how well management is create profits with the investment shareholders have in the company. The higher the Return on Equity Ratio, the better it is.
Enter the amounts, for all three periods, for the Net Income from your company’s Income Statement and Stockholders’ Equity from the balance sheet. For each period, calculate the Return on Equity Ratio using the following formula.
Net Income ÷ Stockholders’ Equity
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Return on Equity Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Return on Equity Ratio for your company is or is not adequate for its future.
Question 5.6 – Return on Equity Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net Income
B
Stockholders’ Equity
C
Return on Equity Ratio
D
Why is or is not the Return on Equity Ratio adequate for your company?
Question 5.7 – Return on Assets Ratio
This ratio is used to measure how well a company is turning its assets into profit. It may sound like the total assets turnover ratio but it is different. The total assets turnover ratio measures how effectively a company’s assets generate revenue. It is a useful tool to measure how well management is turns the company’s assets into profit. The higher the value for the Return on Assets Ratio, the better the company is performing.
Enter the amounts, for all three periods, for the Net Income from your company’s Income Statement and Total Assets from the balance sheet. For each period, calculate the Return on Assets Ratio using the following formula.
Net Income ÷ Total Assets
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Return on Assets Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Return on Assets Ratio for your company is or is not adequate for its future.
Question 5.7 – Return on Assets Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Net Income
B
Total Assets
C
Return on Assets Ratio
D
Why is or is not the Return on Assets Ratio adequate for your company?
E
Return on Asset Ratio trend description
Question 5.8 – Asset Turn Ratio
This ratio is used to measure how well a company is using its assets to create revenues. The higher the value for the Asset Turn Ratio, the better the company is performing.
Enter the amounts, for all three periods, for the Net Sales from your company’s Income Statement and Total Assets from the balance sheet. For each period, calculate the Asset Turn Ratio using the following formula.
Net Sales ÷ Total Assets
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Asset Turn Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Asset Turn Ratio for your company is or is not adequate for its future.
Question 5.8 – Asset Turnover Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Net Sales
B
Total Assets
C
Asset Turn Ratio
D
Why is or is not the Assets Turn Ratio adequate for your company?
E
Asset Turnover Ratio trend description
Question 5.9 – Gross Profit Margin Ratio
This ratio is used to measure the relationship between net sales revenue and the cost of goods sold. It shows the amount of each dollar of sales your company turns into profit. The higher the value for the Gross Profit Margin Ratio, the better your company is performing. It is also important to note different industries may have very different gross margins.
Enter the amounts, for all three periods, for the Gross Profit and Net Sales from your company’s Income Statement. For each period, calculate the Gross Profit Margin Ratio using the following formula.
Gross Profit ÷ Net Sales
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Gross Profit Margin Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Gross Profit Margin Ratio for your company is or is not adequate for its future.
Question 5.9 – Gross Profit Margin Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Gross Profit
B
Net Sales
C
Gross Profit Margin Ratio
D
Why is or is not the Gross Profit Margin Ratio adequate for your company?
E
Gross Profit Margin Ratio trend description
Question 5.10 – Inventory Turnover Ratio
This ratio is used to measure how effectively your company converts its inventory into cash. It shows how well your company manages its inventory levels. If inventory turnover is too low, it may indicate the company is overstocking inventory. It may also indicate the company is having issues selling products. The higher the value for the Inventory Turnover Ratio, the better your company is performing. It is also important to note different industries may have very different inventory turn ratios. For some industries, the Inventory Turnover Ratio is not a significant as it is for other industries.
Enter the amounts, for all three periods, for the Cost of Goods Sold from your company’s Income Statement and Inventory from the balance sheet. For each period, calculate the Inventory Turn Ratio using the following formula.
Cost of Goods Sold ÷ Inventory
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Inventory Turn Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Inventory Turnover Ratio for your company is or is not adequate for its future.
Question 5.10 – Inventory Turnover Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Cost of Goods Sold
B
Inventory
C
Inventory Turn Ratio
D
Why is or is not the Inventory Turn Ratio adequate for your company?
E
Inventory Turnover Ratio trend description
Question 5.11 – Days in Inventory Ratio
This ratio is used to measure how effectively your company holds its inventory before it is sold. Generally, the longer inventory is remains unsold, the greater the chance it may not be sold or sold at less than its value. The Days in Inventory Ratio more important for companies with inventory that is perishable or subject to obsolescence. Companies with short product life cycles like high technology, automobile, toys and fashion might find this ratio important.
Enter the value, for all three periods, for the Inventory Turnover Ratio. For each period, calculate the Days In Inventory Ratio using the following formula.
365 ÷ Inventory Turnover Ratio
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Days In Inventory Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Days In Inventory Ratio for your company is or is not adequate for its future.
Question 5.11 – Days In Inventory Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
365
365
365
365
B
Inventory Turn Ratio
C
Days In Inventory Ratio
D
Why is or is not the Days In Inventory Ratio adequate for your company?
Question 5.12 – Accounts Receivable Turnover Ratio
This ratio is used to measure how effectively your company is able to collect from its customers.
A high turnover value is better. It shows your company is collecting revenues effectively and customers pay bills on time. A high figure also suggests that a firm’s credit and collection policies are sound. Accounts receivable turnover may differ between different industries. For some industries, the Accounts Receivable Turnover Ratio is not a significant as it is for other industries.
Enter the amounts, for all three periods, for the Net Sales from your company’s Income Statement and Accounts Receivable from the balance sheet. For each period, calculate the Accounts Receivable Turnover Ratio using the following formula.
Net Sales ÷ Accounts Receivable
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Accounts Receivable Turnover Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Accounts Receivable Turnover Ratio for your company is or is not adequate for its future.
Question 5.12 – Accounts Receivable Turnover Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Net Sales
B
Accounts Receivable
C
Accounts Receivable Turnover Ratio
D
Why is or is not the Accounts Receivable Turnover Ratio adequate for your company?
E
Accounts Receivable Turnover Ratio trend description
Question 5.13 – Average Collection Period
This ratio is used to measure how effectively your company collects money from customers. The Average Collection Period shows the average number of days the company must wait for its Accounts Receivable to be paid. Comparing the days in the average collection period to the payment terms generally available to customers can help describe how quickly the company is collecting its money. Often, the longer receivables remain unpaid the more difficult they are to collect.
Enter the value, for all three periods, for the Accounts Receivable Turnover Ratio. For each period, calculate the Average Collection Period using the following formula.
365 ÷ Accounts Receivable Turnover Ratio
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Average Collection Period. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Average Collection Period for your company is or is not adequate for its future.
Question 5.13 – Average Collection Period
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
365
365
365
365
B
Accounts Receivable Turnover Ratio
C
Average Collection Period
D
Why is or is not the Average Collection Period adequate for your company?
Question 5.14 – Accounts Payable Turnover Ratio
This ratio is used to measure the length of time needed for your company to repay its vendors.
A high turnover value is better than a low turnover value. Generally, it shows your company is paying bills on time. The ratio might be a good barometer of your company’s financial stability. A high Account Payable Turnover ratio indicates your company produces cash quickly. A low ratio might infer your company may have cash flow issues.
Enter the amounts, for all three periods, for the Cost of Goods Sold from your company’s Income Statement and Accounts Payable from the balance sheet. For each period, calculate the Accounts Payable Turnover Ratio using the following formula.
Cost of Goods Sold ÷ Accounts Payable
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Accounts Payable Turnover Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Accounts Payable Turnover Ratio for your company is or is not adequate for its future.
Question 5.14 – Accounts Payable Turnover Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Cost of Goods Sold
B
Accounts Payable
C
Accounts Payable Turnover Ratio
D
Why is or is not the Accounts Payable Turnover Ratio adequate for your company?
Question 5.15 – Net Working Capital Turnover Ratio
The company’s operations and inventory generate sales. This ratio is used to measure how well the money your company uses to support its operations generates sales. Generally, a higher ratio means the company is generating more sales for each dollar spent on operations. A high turnover value is better than a low turnover value.
Working capital is the difference between current assets and current liabilities. To calculate working capital for your company use the following formula:
Current Assets – Current Liabilities
Working Capital Calculation
Accounts
Current Yr
Previous Yr
Next Previous Yr
Current Assets
Current Liabilities
Working Capital
Enter the amounts, for all three periods, for the Net Sales from your company’s Income Statement and the Working Capital. For each period, calculate the Net Working Capital Turnover Ratio using the following formula.
Net Sales ÷ Working Capital
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Net Working Capital Turnover Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Net Working Capital Turnover Ratio for your company is or is not adequate for its future.
Question 5.15 – Net Working Capital Turnover Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Net Sales
B
Working Capital
C
Net Working Capital Turnover Ratio
D
Why is or is not the Net Working Capital Turnover Ratio adequate for your company?
Question 5.16 – Debt to Equity Ratio
This ratio is used to compare the amount of capital provided by lenders compared to the amount of capital provided by shareholders. The Debt to Income Ratio helps to signal the possibility of debt problems. A company overleveraged with debt makes itself vulnerable to market downturns and unforeseen contingencies. A reasonable balance between debt and equity is generally a healthy position for a company. Depending on the industry and company, a Debt to Equity Ratio between 0.5 and 1.5 is generally acceptable.
Enter the amounts, for all three periods, for the Total Liabilities and Stockholders’ Equity from your company’s balance sheet. For each period, calculate the Debt to Equity Ratio using the following formula.
Total Liabilities ÷ Stockholders’ Equity
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Debt to Equity Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Debt to Equity Ratio for your company is or is not acceptable for its future.
Question 5.16 – Debt to Equity Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Total Liabilities
B
Stockholders’ Equity
C
Debt to Equity Ratio
D
Why is or is not the Debt to Equity Ratio acceptable for your company?
E
Debt to Equity Ratio trend description
Question 5.17 – Debt to Asset Ratio
This ratio is used to compare the amount of debt to the company’s assets. The Debt to Asset Ratio shows how much of your company’s assets were acquired through debt. A ratio greater than one generally means most of the company’s assets are financed through debt. These companies are generally described as “highly leveraged” and could vulnerable from creditor demands for repayment. Depending on the company and the industry, a Debt to Asset Ratio in excess of 65% may indicate debt issues for a company.
Enter the amounts, for all three periods, for the Total Liabilities and Total Assets from your company’s balance sheet. For each period, calculate the Debt to Equity Ratio using the following formula.
Total Liabilities ÷ Total Assets
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Debt to Asset Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Debt to Asset Ratio for your company is or is not acceptable for its future.
Question 5.17 – Debt to Asset Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Total Liabilities
B
Total Assets
C
Debt to Asset Ratio
D
Why is or is not the Debt to Asset Ratio acceptable for your company?
Question 5.18 – Gearing Ratio or Long Term Debt to Shareholders’ Equity Ratio
This ratio is used to compare the amount of long term debt to the stockholders’ equity. The Gearing Ratio shows how well your company’s will be able to service, satisfy existing long term debt or acquire additional long term debt. A company with a high Gearing Ratio is more vulnerable to competitor assaults, price reductions and business downturns. Generally, no matter what the difficulty facing the company, it must continue to service its debt. Companies with a low Gearing Ratio usually have sufficient equity to manage through difficult periods.
Enter the amounts, for all three periods, for the Long Term Liabilities and Stockholders’ Equity from your company’s balance sheet. For each period, calculate the Gearing Ratio using the following formula.
Long Term Liabilities ÷ Stockholders’ Equity
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Gearing Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Gearing Ratio for your company is or is not acceptable for its future.
Question 5.18 – Gearing Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Long Term Liabilities
B
Stockholders’ Equity
C
Gearing Ratio
D
Why is or is not the Gearing Ratio acceptable for your company?
E
Gearing Ratio trend description
Question 5.19 – Interest Coverage Ratio or Debt Service Ratio
This ratio is used to discover how easily your company can pay the interest on its outstanding debt. A low Interest Coverage Ratio can mean your company may find it difficult to pay its debt expense. An Interest Coverage Ratio below 1 might imply a company is not producing sufficient income to pay the interest expenses. Generally, this would indicate caution for an investor.
Enter the amounts, for all three periods, for the Profit Before Taxes and Interest Expense from your company’s Income Statement. For each period, calculate the Interest Coverage Ratio using the following formula.
(Profit Before Taxes+ Interest Expense) ÷ Interest Expense
Enter the amounts in millions of dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Interest Coverage Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Interest Coverage Ratio for your company is or is not acceptable for its future.
Question 5.19 – Interest Coverage Ratio or Debt Service Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Profit Before Taxes
B
Interest Expense
C
Interest Coverage Ratio
D
Why is or is not the Interest Coverage Ratio acceptable for your company?
Question 5.20 –Earnings per Share
Earnings per share means the part of a company’s earnings, net of taxes and preferred stock dividends, allotted to each share of common stock. It is a widely used barometer to measure a company’s profitability per share of common stock. Historically, the Earnings Per Share has played a significant role in determining the market price for stocks. A company’s earnings can change suddenly for many reasons including manipulation, accounting changes, and restatements. For this and many other reasons, the earnings per share is not an absolute determinate of the market value for a company’s shares.
Enter the amounts, for all three periods, for the Earnings Per Share from your company’s Income Statement.
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Earnings Per Share. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Price/Earnings Ratio for your company’s stock is or is not adequate for its future.
Question 5.20 – Earnings per Share
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Earnings Per Share
B
Why is or is not the Earnings Per Share adequate for your company’s stock?
C
Earnings Per Share trend description
Question 5.21 – Price/Earnings Ratio
This ratio is used to learn what investors are currently willing to pay for the company’s earnings. The Price/Earnings Ratio is one of the most widely used measures of stock value. It shows the relationship between the current stock price and the company’s per share of stock. The higher the Price/Earnings Ratio, the more the market is willing to pay for a company’s earnings. Some investors believe a high P/E indicates an overpriced stock. This may be true but it may also mean the market is optimistic about the stock’s future and is willing to pay more for the stock. A low Price/Earnings Ratio might suggest “no confidence” for the stock or it could mean the price is undervalued and may rise in the future. Some “undervalued” stocks have become big winners for some investors. Please note there is a strong emphasis on the word “some”.
Enter the amounts, for all three periods, for the current price of your company’s common stock. Also enter Earnings Per Share from your company’s Income Statement. For each period, calculate the Price/Earnings Ratio using the following formula.
Current Stock Price ÷ Earnings Per Share
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Price/Earnings Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Price/Earnings Ratio for your company’s stock is or is not adequate for its future.
Question 5.21 – Price/Earnings Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Industry Ratio
A
Stock Price
B
Earnings Per Share
C
Price/Earnings Ratio
D
Why is or is not the Price/Earnings Ratio adequate for your company’s stock?
E
Price/Earnings Ratio trend description
Question 5.22 –Dividend per Share
Dividend per share means the part of a company’s earnings paid directly to stockholders for each share of common stock. For companies with preferred stock, the dividends for the preferred stock are identified separate of the dividends for common stock. For some investors dividend income is very significant. Dividends provide income to investors even when the market price for the share may decline.
Companies with a strategic focus on growth may choose to reinvest all their earnings in the company. Typically growth companies will pay low or no dividend. Often, companies might pay high dividends to their shareholders when they have reached their maturity and there is little opportunity for growth. For mature companies, a more effective use of the earnings is to return them to the shareholders in the form of dividends.
Enter the amounts, for all three periods, for the Dividend Per Share of common stock from your company’s Income Statement.
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Dividend Per Share. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Dividend Per Share for your company’s stock is or is not adequate for its future.
Question 5.22 – Dividend per Share
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Dividend Per Share
B
Why is or is not the Dividend Per Share adequate for your company’s stock?
Question 5.23 – Dividend Payout Ratio
This ratio is used to measure the percent of the company’s earnings being returned to the stockholders. The Dividend Payout Ratio is another widely used measure of stock value particularly for those investors interested in stocks with income. It allows investors to identify companies with sufficient internal growth to possibly pay dividends in the future. A ratio between 40% and 60% would allow a company to pay a dividend while continuing to reinvest earnings in the company.
Enter the amounts, for all three periods, for Earnings Per Share and Dividend Per Share from your company’s Income Statement. For each period, calculate the Dividend Payout Ratio using the following formula.
Dividend Per Share ÷ Earnings Per Share
Enter the amounts in dollars from the SEC Form 10K, for the current year, the previous year and the next previous year. Describe the trend direction for the Dividend Payout Ratio. Use phrases like: up only this year but level in previous years, consistently up, down only this year, consistently down or level for all years. Also, in your opinion is the trend positive, negative, insignificant?
Last, in your opinion, explain why the Dividend Payout Ratio for your company’s stock is or is not adequate for its future.
Question 5.23 – Dividend Payout Ratio
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Dividend Per Share
B
Earnings Per Share
C
Dividend Payout Ratio
D
Why is or is not the Dividend Payout Ratio adequate for your company’s stock?
Questions for Chapter 6
Question 6.0 – Calculate the Altman Z-Score
Calculate the Altman Z-Score for you company for the current year, previous year and next previous year. Describe the Altman Z-Score trend. What does the Altman Z-Score trend tell you about the financial strength of your company?
Question 6.0 – Altman Z-Score
Accounts
Current Yr
Previous Yr
Next Previous Yr
Trend Description
A
Altman Z-Score
B
What does the Altman Z-Score trend tell you about the financial strength of your company?
Question 6.1 – What did you learn about your company
What are the major items you learned about your Company? Why were they important for you?
Question 6.1 – What did you learn about your company
What did you learn
Why was it important
A
B
C
D
E
Question 6.2 – Would you buy, sell, hold or stay away
Answer if you would buy, sell, hold or stay away from your company’s common stock. Additionally, what are the three major reasons you might buy, sell, hold or stay away from your company’s common stock?
Question 6.2 – Buy, Sell, Hold or Stay Away
A
Would you buy, sell, hold or stay away
B
Reason 1
C
Reason 2
D
Reason 3
Copyright DA Bittar 2009, 2010, 2012
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