2/26/2024

LECTURE 4: FINANCIAL ANALYSIS

Module 1: Common-size and Trend Analysis
Dr. Tien Ng

DIAGNOSTIC TOOLS

COMMON SIZE TREND FINANCIAL BENCHMARK

(vertical) (time-series) RATIOS (cross-comparison)

Spot key financial Compare growth Evaluate relationships Compare to norms

activities rate over time among elements of e.g. industry level
• balance sheet items as % of financial statements
total assets; • Relevance of ratios & acct
• income statement items as % numbers depends on the
of sales state of the firm

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Cross-sectional Analysis

 Comparison with similar companies in the same industry

35

30

25

20

15

10

Gross margin Income as % of sales Growth in sales

Home Deport Lowe's

Common-size & Trend Analysis

Case study:
Home Depot

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Note:
- Vertical Income Statement
presents the change in
Home Depot composition of costs mix.
- All accounts in Vertical
Income Statement are
presented as proportion
Figure 2. Common-size vertical Income Statement variables (i.e. expresses each
2006 2005 2004 2003 2002 line in term of % of sales)
Net revenue 1.000 1.000 1.000 1.000 1.000
Cost of sales 0.672 0.665 0.666 0.682 0.689
Gross margin 0.328 0.335 0.334 0.318 0.311
SG&A 0.202 0.202 0.209 0.196 0.195
Depreciation and amortization 0.019 0.018 0.017 0.016 0.016
Operating income 0.106 0.115 0.108 0.106 0.1
Interest & investment income 0 0.001 0.001 0.001 0.001
Interest expenses 0.004 0.002 0.001 0.001 0.001
Earnings before taxes 0.102 0.114 0.108 0.106 0.101
Income taxes 0.039 0.042 0.04 0.039 0.038
Net income 0.063 0.072 0.068 0.066 0.063

Note:
- Percentage change Income
Statement presents the
historical trend/pattern of
Home Depot revenue, costs and net
income
- - All accounts in Percentage-
change Income Statement are
Figure 1. Percentage change in Income Statement presented as growth variables
2006 2005 2004 2003
Net revenue 11.4 11.5 12.8 11.3  side note:
Cost of sales 12.7 11.4 10.0 10.2 - top-line growth slowed down:
Gross margin 9.0 11.8 18.7 13.7 unusual 2004 or maturity stage?
SG&A 11.3 8.1 20.0 11.8  side note:
Depreciation and amortization 19.7 17.9 22.2 13.1 - why increasing SGA?
Operating income 3.3 18.1 15.8 17.4
Interest & investment income (56.5) 10.7 (5.1) (25.3)
Interest expenses 174.1 104.3 12.9 67.6
Earnings before taxes 0.3 17.3 15.6 16.5
Income taxes 3.0 18.3 14.7 15.0
Net income (1.3) 16.7 16.2 17.5 side note:
Diluted EPS 2.6 20.4 20.2 20.5 - declined NI was accompanied
with increased EPS?

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- Vertical Balance Sheet

Home Depot presents the change in

composition of assets,
liabilities and equity
Figure 4. Common-size vertical Balance Sheet - - All accounts in Vertical
2006 2005 2004 2003 2002 Balance Sheet are presented
Assets as proportion variables(i.e.
Cash and marketable securities 0.01 0.02 0.06 0.08 0.08 expresses each line in term of
Receivables 0.06 0.05 0.04 0.03 0.04 % of assets)
Inventories 0.25 0.26 0.26 0.26 0.28
Other current assets 0.03 0.01 0.01 0.01 0.01
PPE 0.51 0.56 0.58 0.58 0.57  side note:
Goodwill (M&A activities) 0.12 0.08 0.04 0.02 0.02
- change in the mix of assets
Other assets 0.03 0.01 0.02 0.01 0.01
Total assets 1.00 1.00 1.00 1.00 1.00
Liabilities and Equity
Payables 0.14 0.14 0.15 0.15 0.15
Accrued expenses 0.02 0.07 0.08 0.07 0.07
Deferred revenue 0.03 0.04 0.04 0.04 0.03
Other current liabilities 0.05 0.04 0.00 0.02 0.01
Noncurrent LT debts 0.22 0.06 0.06 0.02 0.04  side note:
Other LT liabilities 0.06 0.04 0.06 0.05 0.03 - change in the capital structure:
Common stock 0.15 0.17 0.17 0.18 0.20 use of D proceeds to MA and
Retained earnings 0.63 0.65 0.61 0.57 0.53
repurchase shares
Treasury stock (0.31) (0.22) (0.17) (0.10) (0.07)
Total liabilities and equity 1.00 1.00 1.00 1.00 1.00

- Percentage change Balance

Home Depot Sheet presents the historical
trend/pattern of assets,
liabilities and equity
Figure 3. Percentage change Balance Sheet - All accounts in Percentage-
2006 2005 2004 2003 change Balance Sheet are
Assets
Cash and marketable securities (23.9) (62.7) (24.1) 26.6
presented as growth variables
Receivables 34.5 59.8 36.6 2.3
Inventories 12.5 13.2 11.0 8.9
Other current assets 101.7 24.8 75.9 19.3  side note:
PPE 6.8 9.6 13.3 16.9 - increase M&A activities to
Goodwill 71.4 160.9 69.5 44.9 support maturity stage
Other assets 143.9 (9.5) 185.9 (39.3)
Total assets 17.7 13.8 13.3 14.7  side note:
Liabilities and Equity
- Asset efficiency? Sale growth in
Payables 21.9 4.6 11.8 13.1
Accrued expenses (60.9) 11.4 22.3 8.3 2006 was only 11.4%?
Deferred revenue (7.0) 13.6 20.7 28.4
Other current liabilities 46.9 947.1 (74.9) 192.3
Noncurrent LT debts 335.7 24.4 150.9 (35.2)
 side note:
Other LT liabilities 54.4 (14.9) 39.4 89.9
Common stock 8.7 9.4 7.4 5.5 - growth in D is faster than
Retained earnings 14.2 20.8 21.8 23.2 growth in E
Treasury stock 68.7 45.1 86.4 79.5 - change in K structure to
Total liabilities and equity 17.7 13.8 13.3 14.7 support M&A and buy-back

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Common-size & Trend Analysis

Case study:
Mai Linh Group

Mai Linh Group

Percentage Change in Common-size Vertical

Balance Sheet Balance Sheet
2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011
Sales 356% 64% 16% 15% 11%
Selling exp. 790% 172% 32% 54% -2% 1% 2% 3% 3% 4% 4%
Admin exp. 158% 55% 14% -2% 4% 23% 13% 12% 12% 10% 10%
AR 137% -8% 22% 37% 28% 22% 19% 13% 13% 17% 20%
PPE 335% 109% 25% 4% 12% 18% 28% 43% 45% 45% 47%

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Mai Linh Group

Percentage Change in Common-size Vertical

Balance Sheet Balance Sheet
2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011
AR 137% -8% 22% 37% 28% 22% 19% 13% 13% 17% 20%
Fixed assets 335% 109% 25% 4% 12% 18% 28% 43% 45% 45% 47%
ST Debt 94% 181% 44% 19% -3% 12% 9% 18% 21% 24% 22%
LT Debt 130% 30% 26% -9% 0% 46% 38% 36% 39% 34% 32%