Financial Analysis for Union Researchers

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

19. Tom Juravich

20. Tom Juravich

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

27. Tom Juravich

28. Tom Juravich

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

30. Tom Juravich

31. Tom Juravich

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

40. Tom Juravich

41. Tom Juravich

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