Financial Statement Analysis

Winter 2019~2020 school year

Yonsei MBA
Professor Seong Cho

Ying Huang
2019427051
Part 2

Answer the following questions based on the group presentations on Friday (answer to the questions on
the other groups’ choices only. For example, your group choice was Microsoft, skip the question on
Microsoft)

Question on Microsoft (MSFT):

What was the reason for MSFT drop in NOPM in 2018?
 Two main reasons causing the drop in NOPM in 2018: increased sales revenue and decreased
net operating income. Microsoft sales revenue increased 22.7% compared to 2017’s because its
commercial cloud service revenue increased 56% and generated 23.2 billion for company. The
decreased net operating income is mainly due to the net charge from enactment if Tax Cuts and
Jobs Act. TCJA caused company’s effective tax rate increased from 15% in 2017 to 55% in 2018.
Microsoft’s income before tax increased from 2017, however, the great tax provision
contributed to the lower net operating income than 2017’s.

Question on Facebook (FB):

What does the reduction in free cash flow to total debt in 2018 indicate?
 FB borrowed a great amount of current debt and paid off all long-term debts in 2018. FB’s high
cash flow from operating to debt ratio and high growth rate in revenue indicate current debt
can be paid off. FB might use those debts to purchase PP&E (servers, data centers,
infrastructures) for future growth increasing its capital expenditure and reducing FCF. The
reduction of this ratio indicates FB’s positive expectation for its future growth and they still
maintain high ratio above its competitors. They may keep increasing capital expenditure by
issuing debts which means the ratio will keep decreasing.

Question on L’Oreal (LXLCY):

The group presentation stated the following with the total liabilities to equity analysis:
“Total liabilities kept increasing – however, 70% comes from RE which means company is profitable.”
What is your understanding on this statement and explain whether it is correct statement or not?
 It is incorrect. 70% is calculated as common equity/total liabilities and equity (or total assets). It
means 30% of company’s assets are financed by creditors and L’Oreal is less risky. But it doesn’t
guarantee the company is profitable. The increasing retained earnings show the company have
been profitable in the past and pay less dividends than its profit. But the company is holding the
money which may be not good for its future growth.

Question on Exxon Mobile (XOM):

Which year XOM had most tax benefit during 2015~2018. What was the reason for that large tax
benefit?
 2017 XOM’s effective income tax rate is only 5% compared to 13% in 2016 and 37% in 2017.
 Exxon Mobile kept investing in alternative energy development and government provided tax
advantages to support those R&D activities. XOM received exploration tax benefits of $708
million in 2017. U.S. tax reform impact of 5.9 billion reduction in income tax payment which
offsets by higher pre-tax income.