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Financial Analysis for Union Researchers

Financial Analysis for Union Researchers. Tom Juravich UMASS Amherst Labor Center. Why Do Strategic Researchers Avoid Financial Analysis ?. How Corporate Finance Typically Used in Labor Movement. The CEO is making $1.25 million, so you can afford giving us a raise

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Financial Analysis for Union Researchers

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  1. Financial Analysis for Union Researchers Tom Juravich UMASS Amherst Labor Center

  2. Why Do Strategic Researchers Avoid Financial Analysis ? Tom Juravich

  3. How Corporate Finance Typically Used in Labor Movement • The CEO is making $1.25 million, so you can afford giving us a raise • Your revenue is up 15%, so you can afford to give us a raise • Your stock price has gone up by 10%, so you can afford to give us a raise Tom Juravich

  4. Goals for this Session • Demonstrate how all these uses of financial analysis are incorrect • Provide introduction to basic financial analysis • In process demystify corporate finance • Begin process of self-study Tom Juravich

  5. Our Approach • Learn by doing • No extensive hypotheticals • Work through a real example (Verizon) using information available to anyone online • Model a method to use on your own case Tom Juravich

  6. Three Basic Financial Skills • Understanding basic financial statements • Income Statement • Balance Sheet • Statement of Cash Flow • Working with key financial ratios • Stock analysis Tom Juravich

  7. What We Can Accomplish • Assessment of overall financial condition • How the company generates profit • The relative importance of various segments • An understanding of financial change over time • Comparison with other firms and the industry Tom Juravich

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

  9. A Few Reminders • Look at the forest not the trees • Don’t get fixated on any one detail, especially one you don’t understand • Use your knowledge of the firm to understand the numbers Tom Juravich

  10. Finding Financial Information • Readily available for publicly held firms • In 10-K reports • Many Secondary sources • Yahoo Finance – basic • Mergent – more detailed • We will use Yahoo for financial statements • We will use Mergent for financial ratios, segments Tom Juravich

  11. Concepts and a Vocabulary • Each financial statement contains specific concepts and vocabulary • Will focus on key concepts for each statement • Get familiar with concepts before we get to the numbers • Key concepts will be bolded in the text Tom Juravich

  12. Income Statement – What Is It? • Also referred to as a profit and loss statement (P&L) • Shows the performance of a firm over a period of time (year/quarter) • Provides insights into the operation of a firm • A moving picture of a firm Tom Juravich

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

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

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

  16. Income Statement – Net Income • Operating Income – Taxes = Net Income • Everybody knows what taxes are • Net Income is the bottom line of the Income Statement • A common financial measure Tom Juravich

  17. Income Statement– Simple Example I just 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

  18. Income Statement – Real Example • Actual Income Statements are much more detailed • Categories are broken into sub-categories • Additional adjustments are made • Begin by looking for key concepts Tom Juravich

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  21. Income Statement – Limitations • Includes one kind of financial information • What it doesn’t include: • Anything about debt • Anything about buildings or equipment • Anything about stockholders • To get this information –Balance Sheet Tom Juravich

  22. Balance Sheet – What Is It? • A snapshot of a firm at one point in time • Based on double entry accounting • By definition a balance sheet must balance Tom Juravich

  23. Balance Sheet – Basic Formula • Assets = Liabilities + Shareholder’s Equity • Shareholder’s Equity is treated as if it were a loan Tom Juravich

  24. Shareholders Equity More Than it Seems • Also includes Retained Earnings • Funds a firm carries over to next year • Net Income - dividends paid to stockholders • Can be negative (loss) • One of the reasons the balance sheet balances • Conceptually distinct from shareholders equity – yet included in this section of balance sheet Tom Juravich

  25. Balance Sheet – Detailed • Assets • Current Assets Cash Accounts Receivable Inventory • Non current (Fixed) Buildings Equipment Liabilities • Current Liabilities Accounts Payable Short-term Notes (less than 1 year) • Non-Current Long term debt (more than 1 year) Tom Juravich

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

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  29. Cash Flow –What Is It? • Tracks the generation and use of cash in three basic areas • Investing • Financing • Operations • The least useful annual financial statement • Quarterly statements more helpful Tom Juravich

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  32. Why Financial Ratios • Limits to eyeballing financial statements • Ratios combine one or more pieces of data • In essence “normalize” data • Useful in comparing across companies Tom Juravich

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

  34. Key Financial Ratio –Types • Although there are many classifications, we will explore ratios in four areas • Liquidity • Profitability • Debt Management • Asset Management Tom Juravich

  35. Liquidity RatioCurrent Ratio • Current Ratio = Current Assets Current Liabilities Accepted Standard: Varies by industry • Low Ratio: May be unable to meet obligations • High Ratio: Too conservative growth plan • Loan rates often tied to maintaining a certain current ratio Tom Juravich

  36. Profitability RatioReturn on Assets (ROA) ROA = Income Before Taxes (Operating Income) Assets • Accepted Standard: Varies by industry and amount of fixed assets • Low Ratio: Poor use of assets • High Ratio: Strong performer Tom Juravich

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

  38. Asset Management RatioInterest Coverage • Interest Coverage = Operating Income Interest Obligation • Accepted Standard: Varies by industry • Low Ratio: Too heavily burdened with debt • High Ratio: Too conservative in borrowing Tom Juravich

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

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  42. Key Ratios – Competitors VZ T S Current Ratio 0.78 0.66 1.27 ROA 1.70 4.69 (4.29) Debt/Equity 1.50 0.71 1.16 Interest Coverage 4.63 6.36 na Tom Juravich

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

  44. Verizon Segment Analysis Tom Juravich

  45. Verizon Segment Analysis Tom Juravich

  46. Verizon Segment Analysis Tom Juravich

  47. AT & T Segment Analysis Tom Juravich

  48. AT & T Segment Analysis Tom Juravich

  49. AT & T Segment Analysis Tom Juravich

  50. Stock Analysis • Often ignored in financial analysis • Huge amount of materials available for self study • Both data and analysts’ reports are readily available Tom Juravich

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