Applying Financial Statement Analysis CHAPTER
Applying Financial Statement Analysis CC CHAPTER
Prelude to Comprehensive Analysis Steps in Analyzing Financial Statements Explicitly define the analysis objectives Formulate specific questions and criteria consistent with the analysis objectives Identify the most effective and efficient tools of analysis Interpret the evidence
Prelude to Comprehensive Analysis Steps in Analyzing Financial Statements • Explicitly define the analysis objectives • Formulate specific questions and criteria consistent with the analysis objectives • Identify the most effective and efficient tools of analysis • Interpret the evidence
Prelude to Comprehensive Analysis Building Blocks of Analysis Analysis emphasizes six areas of inquiry--with varying degrees of Importance Short-term liquidity--Ability to meet short-term obligations Cash flow and forecasting--Future availability and disposition of cash Capital structure and solvency--Ability to generate future revenues and meet long-term obligations Return on invested capital--Ability to provide financial rewards sufficient to attract and retain financing Asset turnover--Asset intensity in generating revenues to reach a sufficient profitability level Operating performance and profitability--Success at maximizing revenues and minimizing expenses from operating activities over the long run
Building Blocks of Analysis Prelude to Comprehensive Analysis Analysis emphasizes six areas of inquiry—with varying degrees of importance • Short-term liquidity--Ability to meet short-term obligations. • Cash flow and forecasting--Future availability and disposition of cash. • Capital structure and solvency--Ability to generate future revenues and meet long-term obligations. • Return on invested capital--Ability to provide financial rewards sufficient to attract and retain financing. • Asset turnover--Asset intensity in generating revenues to reach a sufficient profitability level. • Operating performance and profitability--Success at maximizing revenues and minimizing expenses from operating activities over the long run
Prelude to Comprehensive Analysis Reporting on Financial Statement Analysis Analysis report typically contains at least six distinct sections 1. Executive Summary--Brief summary focuses on important analysis results 2. Analysis overview--Background material on the company, its industry, and its economic environment 3. Evidential matter--Financial statements and information used in the analysis. This includes ratios, trends, statistics, and all analytical measures assembled 4. Assum ptions--Identification of important assumptions regarding a company's industry and economic environment and other important assumptions for estimates or forecasts 5. Crucial factors--Listing of important favorable and unfavorable factors, both quantitative and qualitative, for company performance--usually listed by areas of analysis 6. Inferences--Includes forecasts, estimates, interpretations and conclusions drawing on all four prior sections of the report
Reporting on Financial Statement Analysis Prelude to Comprehensive Analysis Analysis report typically contains at least six distinct sections: 1.Executive Summary--Brief summary focuses on important analysis results. 2.Analysis overview--Background material on the company, its industry, and its economic environment. 3.Evidential matter--Financial statements and information used in the analysis. This includes ratios, trends, statistics, and all analytical measures assembled. 4.Assumptions--Identification of important assumptions regarding a company’s industry and economic environment, and other important assumptions for estimates or forecasts. 5.Crucial factors--Listing of important favorable and unfavorable factors, both quantitative and qualitative, for company performance—usually listed by areas of analysis. 6. Inferences--Includes forecasts, estimates, interpretations, and conclusions drawing on all four prior sections of the report
Case: Campbell Soup Co. Preliminary Financial Analysis Exhibit CC. 1 CAMIiPBEEE SOUIPCOMPANY Sales Contribution and Percent of sales by Division($ mil.) Year 11 Year 10 Year 8 Year 7 Year 6 Sales Contribution: Campbell North America Campbell U.S.A s3,911.8$393273.6669$3094.1$2,8814$2,910.1 Campbell Canada 352.0 384.0 3134 313.1 3128 255.1 4,2638$43167s3,980.3$3,4072$3194.2 3,1652 Campbell Biscuit and Bakery Pepperidge Farm s5690 1939 s5484 $458.5$420.1 International Biscuit 2194 178.0 7884$777.3s7264$4950$458.5 420.1 Campbell International s1,2229S1,1898s1,0303$1,0365s897.8 766.2 Interdivision (71.0) (78.0) (64.9) (69.8) (64.7) Total sales s6,204.1s62058s5672.1$48689$44904$4,286.8 Percent of sales: Campbell North America Campbell U.s.A. 63.0% 634% 64.7%63.6% 64.2% 679% Campbell Canada 6.9 696 70.2 70.0 Campbell Biscuit and Bakery pperidge Farm 9.2 94 97 102 10.2 9.8 International Biscuit 12.7 10.2 Campbell International 197 19.2 18.2 21.3 20.0 179 Interdivision Total sales 1000% 100.0% 100.0% 100.0% 100.0% 100.0%
Case: Campbell Soup Co. Preliminary Financial Analysis Exhibit CC.1 CAMPBELL SOUP COMPANY Sales Contribution and Percent of Sales by Division ($ mil.) Year 11 Year 10 Year 9 Year 8 Year 7 Year 6 Sales Contribution: Campbell North America: Campbell U.S.A $ 3,911.8 $ 3,932.7 $ 3,666.9 $ 3,094.1 $ 2,881.4 $ 2,910.1 Campbell Canada 352.0 384.0 313.4 313.1 312.8 255.1 $ 4,263.8 $ 4,316.7 $ 3,980.3 $ 3,407.2 $ 3,194.2 $ 3,165.2 Campbell Biscuit and Bakery: Pepperidge Farm $ 569.0 $ 582.0 $ 548.4 $ 495.0 $ 458.5 $ 420.1 International Biscuit 219.4 195.3 178.0 — — — $ 788.4 $ 777.3 $ 726.4 $ 495.0 $ 458.5 $ 420.1 Campbell International $ 1,222.9 $ 1,189.8 $ 1,030.3 $ 1,036.5 $ 897.8 $ 766.2 Interdivision (71.0) (78.0) (64.9) (69.8) (60.1) (64.7) Total sales $ 6,204.1 $ 6,205.8 $ 5,672.1 $ 4,868.9 $ 4,490.4 $ 4,286.8 Percent of Sales: Campbell North America: Campbell U.S.A. 63.0% 63.4% 64.7% 63.6% 64.2% 67.9% Campbell Canada 5.7 6.2 5.5 6.4 6.9 5.9 68.7 69.6 70.2 70.0 71.1 73.8 Campbell Biscuit and Bakery: Pepperidge Farm 9.2 9.4 9.7 10.2 10.2 9.8 International Biscuit 3.5 3.1 3.1 — — — 12.7 12.5 12.8 10.2 10.2 9.8 Campbell International 19.7 19.2 18.2 21.3 20.0 17.9 Interdivision (1.1) (1.3) (1.2) (1.4) (1.3) (1.5) Total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%