Financial Analysis

for Union Researchers

Tom Juravich UMASS Amherst Labor Center How Corporate Finance is typically used in unions

n Your revenue is up 15%, so you can afford to give us a raise n Your stock price has gone up by 10%, so you can afford to give us a raise

Tom Juravich 2 Goals for this Session n Demonstrate how both these uses of financial analysis are incorrect n Introduction to basic financial analysis n Demystify corporate finance n Begin process of self-study

Tom Juravich 3 Our Approach

n Learn by doing n No extensive hypotheticals n Work through a real example (Verizon) using information available to anyone online n Model a method to use on your own research

Tom Juravich 4 Three Basic Financial Skills n Understanding basic financial statements

n Income Statement n Balance Sheet n Statement of Cash Flow n Working with key financial ratios n Stock analysis

Tom Juravich 5 What We Can Accomplish n Assessment of overall financial condition n How the company generates profit n Relative importance of various segments n Understanding of financial change over time n Comparison with other firms and the industry

Tom Juravich 6 What We Won’t Accomplish n Not provide the basics of accountancy n Not conduct a full blown financial analysis

Tom Juravich 7 A Few Reminders

n Look at the forest not the trees n Don’t get fixated on any one detail, especially one you don’t understand n Use your knowledge of the firm to understand the numbers

Tom Juravich 8 Finding Financial Information n Readily available for publicly held firms n In 10-K reports

n Many Secondary sources

n Yahoo Finance – basic

n Mergent – more detailed n We will use Yahoo for financial statements n We will use Mergent for financial ratios, segments

Tom Juravich 9 Concepts and a Vocabulary

n Each financial statement contains specific concepts/ vocabulary n Focus on key concepts for each statement n Get familiar with concepts before we get to the numbers n Key concepts will be bolded in the text

Tom Juravich 10 Income Statement n Also referred to as a profit and loss statement (P&L) n Shows the performance of a firm over a period of time (year/quarter) n Provides insights into the operation of a firm n A moving picture of a firm

Tom Juravich 11 Income Statement – Basic Formula n Revenue – Expense = Income n What is Revenue? n Sales n Inflow of Resources n What are Expenses n Expenditures n Outflow of Resources

Tom Juravich 12 Income Statement – Gross Profit n Revenue – Cost of Goods Sold (COGS) = Gross Profit n What makes up COGS? n Materials n Labor Costs n Anything directly involved in production n COGS does not include all costs of doing business n That’s why is call Gross Profit

Tom Juravich 13 Income Statement – Operating Income n Gross Profit – (Sales, general, and administrative + depreciation) = Operating Income n What is SG&A n Sales costs n Administrative costs n Management costs n What is Depreciation n Cost due to wear and tear on equipment n Operating Income a more fine-tuned measure

Tom Juravich 14 Income Statement – Net Income

n Operating Income – Taxes = Net Income n Net Income is the bottom line of the Income Statement n A common financial measure

Tom Juravich 15 Income Statement – Simple Example

I bought some studio equipment to produce a CD. What would an Income Statement look like?

Revenue CD Sales COGS Studio Supplies Studio Musicians Manufacture of CDs Gross Profit SG&A Administrative Staff Person CD Give-aways Depreciation Studio Equipment Operating Income Income Tax Net Income Tom Juravich 16 Income Statement – Real Example n Actual Income Statements are much more detailed

n Categories are broken into sub-categories n Additional adjustments are made n Begin by looking for key concepts

Tom Juravich 17 Tom Juravich 18 Tom Juravich 19 Income Statement – Limitations n Includes one kind of financial information n What it doesn't’ include:

n Anything about debt n Anything about buildings or equipment n Anything about stockholders n To get this information –Balance Sheet

Tom Juravich 20 Balance Sheet

n A snapshot of a firm at one point in time n Based on double entry accounting n By definition a balance sheet must balance

Tom Juravich 21 Balance Sheet – Basic Formula

n Assets = Liabilities + Shareholder’s Equity

n Shareholder’s Equity is treated as if it were a loan

Tom Juravich 22 Shareholders Equity More Than it Seems n Also includes Retained Earnings

n Funds a firm carries over to next year n Net Income - dividends paid to stockholders n Can be negative (loss)

n Conceptually distinct from shareholders equity – yet included in this section of balance sheet

Tom Juravich 23 Balance Sheet – Detailed n Assets

n Current Assets Cash Accounts Receivable Inventory n Non current (Fixed) Buildings Equipment Liabilities

n Current Liabilities Accounts Payable Short-term Notes (less than 1 year) n Non-Current Long term debt (more than 1 year)

Tom Juravich 24 Balance Sheet – Simple Example

Let’s go back to my music example n Assets n Current Assets Cash -- Checking account balance Accounts Receivable – What I’m owed for CDs Inventory – Unsold CDs n Non current (Fixed) Buildings – My barn studio Equipment – Recording gear, instruments Liabilities n Current Liabilities Accounts Payable -- What I owe recording studio Short-term Notes – Credit card balance n Non-Current Long term debt – Home equity loan

Tom Juravich 25 Tom Juravich 26 Tom Juravich 27 Cash Flow n Tracks the generation and use of cash in three basic areas

n Investing n Financing n Operations n The least useful annual financial statement n Quarterly statements more helpful

Tom Juravich 28 Tom Juravich 29 Tom Juravich 30 Why Financial Ratios

n Limits to eyeballing financial statements n Ratios combine one or more pieces of data n In essence “normalize” data n Useful in comparing across companies

Tom Juravich 31 Key Financial Ratios n No need to calculate by hand n Many different sources n Stick with one source – methods may vary n Many different classifications and definitions

Tom Juravich 32 Key Financial Ratio –Types n Although there are many classifications, we will explore ratios in four areas

n Liquidity

n Profitability

n Debt Management

n Asset Management

Tom Juravich 33 Liquidity Ratio Current Ratio n Current Ratio = Current Assets Current Liabilities

Accepted Standard: Varies by industry n Low Ratio: May be unable to meet obligations n High Ratio: Too conservative growth plan n Loan rates often tied to maintaining a certain current ratio

Tom Juravich 34 Profitability Ratio Return on Assets (ROA)

ROA = Income Before Taxes (Operating Income) Assets n Accepted Standard: Varies by industry and amount of fixed assets n Low Ratio: Poor use of assets n High Ratio: Strong performer

Tom Juravich 35 Debt Management Debt/Equity n Debt/Equity = Debt Equity n Accepted Standard: Less than .8 n Low Ratio: Too fiscally conservative n High Rates: Too risky

Tom Juravich 36 Asset Management Interest Coverage

n Interest Coverage = Operating Income Interest Obligation n Accepted Standard: Varies by industry n Low Ratio: Too heavily burdened with debt n High Ratio: Too conservative in borrowing

Tom Juravich 37 Financial Ratio Summary n Current Ratio – High good to a point > n Return on Assets (ROA) – Higher the better > n Debt to Equity – Lower good to a point < n Interest Coverage – Higher good to a point >

Tom Juravich 38 Tom Juravich 39 Tom Juravich 40 Key Ratios – Competitors

VZ T TMUS

Current Ratio 0.84 0.79 .74 ROA 6.92 2.57 4.35 Debt/Equity 1.82 0.89 1.02 Interest Coverage 6.59 3.32 5.15

Tom Juravich 41 Why A Segment Analysis? n Digs deeper into company operations n Identifies where revenues and income are generated n Key in developing points of leverage

Tom Juravich 42 Verizon Segment Analysis

Tom Juravich 43 Verizon Segment Analysis

Tom Juravich 44 Stock Analysis

n Often ignored in financial analysis n Huge amount of materials available for self study n Both data and analysts’ reports are readily available

Tom Juravich 45 What are Analysts Saying?

n VZ = Buy n T = Buy n TMUS = Strong Buy

Tom Juravich 46 What We Learned About Verizon?

1 2 3 4 5 6 7

Tom Juravich 47 Materials for Assignment n Already done the computer work and are providing you with the following:

n Yahoo Financial Statements n Mergent Financial Ratios (historical) n Mergent Financial Ratios on competitors n Segment Analysis (when available)

Tom Juravich 48 Your Assignment n Prepare a financial analysis presentation for your company.

n Overview of basic financial statements, including historical analysis n Comparison with competitors n Segment analysis n Overall summary n Remember it’s about the forest not the trees!!!

Tom Juravich 49