greg gleeson, cpa, cfa chief operating officer- grow partners, llc [email protected]
TRANSCRIPT
Financial Accounting
Greg Gleeson, CPA, CFAChief Operating Officer- GROW Partners, LLC
How to think like an Accountant …(esp around Valentine’s Day)
Financial Health of Company Track Record of Management Independently Audited & Objective Ease of Comparison Across Companies Valuation of Company Starting point for all Financial Analysis
Why are Financial Statements Important?
Backward Looking Highly Summarized Accrual Basis Non Cash Items (“Stock Options”) Subjective “One-Time” Charges Accounting Elections can Make Comparisons
Difficult
Why are Financial Statements Limited?
Financial Data Providers have Distilled (Bloomberg, Factset, Reuters) many important facts
Financial Ratios provide important information and details, without having to read financials themselves
There are many analysts out there who review info for you
…however…
Strong fundamental research requires in-depth review/knowledge of accounting
Ability to review/examine/digest financial statements is a growing area of need in money management (e.g., forensic accounting research, fraud specialization)
Do you need CPA to Review and Understand Financial Statements?
Auditors Report Balance Sheet Income Statement Statement of Cash Flows Statement of Changes in Equity & Retained
Earnings Footnotes Management Discussion and Analysis Ratios
Financial Statement Components
Auditors Report
Was an Audit Even Done? Who are the Auditors? Was it Prepared in Accordance with GAAP? Is the Report Unqualified (i.e., Clean)Is the report QualifiedHas the Firm Changed Audit Firms in Recent
Years?
Financial Statement- Balance Sheet
Assets◦ Current:
Cash/Inventory/Receivables
◦ Non-Current Fixed Assets Long term receivables Intangibles – such as goodwill
Liabilities◦ Current
Accounts Payable
◦ Non Current Long-Term Debt
Equity◦ Capital Raised◦ Cumulative P&L ◦ Dividends Paid
Financial Statement- Income Statement
Revenues◦ Accounted for an accrual basis◦ Cost of good sold (inventory), can greatly distort◦ Can be subject to management’s estimates of timing
Expenses◦ Accounted for on an accrual basis◦ Can be subject management’s estimates of timing
Other (One-time)◦ Why does the company have one-time charges?◦ Are “one-time” charges routine at this company?
Accounting Jokes…cont’d
Statement of Cash Flows
Cash Flow From Operations◦ Translates Accrual Basis to Cash Basis
Cash Flow from Investing Activities◦ Accounts for “big ticket” items that are typically capitalized
Cash From Financing Activities◦ Shows the sources of capital raising activities during the period
Statement of Changes in Equity & Retained Earning:
Drills Down the Equity Section of the Balance Sheet
Shows the Roll-Forward of Equity for Various Types of Shareholders (e.g., common, preferred)
Shows if There are Other Minority Owners of Company Out There That You Need to Worry About
Footnotes: Devil’s in the Details…
“Minimum” Color Required by GAAP Audited Provides Critical Information to Understand
Financial Statements
Ratios: Accounting Shorthand
Reader’s Digest of Financial Statements Allows for Quick Comparisons against Prior
Periods and Peers Widely Used Ratios can Measure Many
Dimensions of Financial Reporting:
Other Information: MD&A
Additional Color Provided by Management Can be Forward Looking Unaudited Can Highlight Items Not in the Financial
Statements
Case Study: Cisco (CSCO)
Key Statistics
52 Week Range 14.96-21.34
Avg Daily Vol (3 Mo) 38,579,652.0
Market Value (B) 111.3
Ent Value (B) 82.7
Shares Out (M) 5,309
Dividend Yield 2.7%
Float 99.7%
Institutional 73.8%
Top 10 Inst Hldrs 22.3%
Analyst Coverage 39
Target Price $22.89
LT Growth Rate 10.9%
Avg RatingOverweight
(1.39)
4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12 1/1312
14
16
18
20
22
24
26
28
30
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
Source: FactSet Prices
Cisco Systems Inc. vs. S&P 500 (Operating Basis)11-Feb-2010 to 11-Feb-2013 Price (Local Currency)
Cisco Systems Inc. (Right) S&P 500 (Operating Basis) (Left)
Case Study: Cisco - Balance Sheet
Almost $49B in Cash and Growing
Low A/R (falling)
Purchased Companies in Past
Took Cash, Haven’t Booked Revs
25% of Company Leveraged
Cumulatively, Have Been Profitable
Has Healthy Equity
Leases (increasing)
Grew 12% over past 3 years
Grew 24% over past 3 years
Grew 10% over past 3 years
Grew 10% over past 3 years
Grew 3.5% over past 3 years
Case Study: Cisco – Income Statement
Grew 10% over past 3 years
Starting Paying Dividend
Collecting Faster than in Past
More Profitable than P&L Shows
Stopped Buying Companies
Slowed down Purchasing Own Stock
Increasing Dividend
Case Study: Cisco – Stmt of Cash Flow
Extending more Credit (leases)
Leases grew by 9.5% in 1 year, Faster than revenues….
Past Due Increased by 43% in 1 year
Case Study: Cisco – Footnotes (40 pages worth)
Provides warning about When Revenues Booked
Case Study: Cisco – MD&A (Un-Audited)
Case Study: Cisco – Ratios (Unaudited)
CSCO S&P 500 Diff Notes
Valuation
Price/Earnings (x) 10.70 14.17 -32% Low Valuation
Price/Sales (x) 1.86 1.30 30% High Valuation
Price/Book Value (x) 1.65 2.27 -38% Low Valuation
Price/Cash Flow (x) 7.50 8.70 -16% High Valuation
Enterprise Value/EBIT (x) 5.02 11.66 -132% Low Valuation
Enterprise Value/EBITDA (x) 4.01 8.53 -113% Low Valuation
Enterprise Value/Sales (x) 1.13 1.83 -62% Low Valuation
Profitability
Gross Margin (%) 60.43 31.09 49% Good Margin
SG&A to Sales (%) 37.87 22.57 40% High expenses
Operating Margin (%) 13.53 22.06 -63%
Net Margin (%) 17.46 9.23 47% Good Margin
Return on Assets (%) 8.99 3.38 62% Good Margin
Return on Equity (%) 16.32 15.52 5% Good Margin
Efficiency
Revenue/Employee 0.69 690k/employee
Receivables Turnover (x) 6.63 How many times a year do you collect full A/R
Inventory Turnover (x) 11.58How many times a year do you deplete inv
Days of Inventory on Hand 31.53 Tight inventory
Payables Turnover (x) 21.21 Aren't sitting on bills
Days of Payables Outstanding 17.21 Aren't sitting on bills
Liquidity
Current Ratio 3.49Have the ability to pay off liabilities 3.4x
Quick Ratio 3.40Have the ability to pay off liabilities 3.4x (excluding inventory)
Credit Analysis
EBITDA/Interest Expense (x) 21.84 12.85 41%Interest not a concern
LT Debt/Total Capital (%) 24.10 36.02 -49% Not highly levered
Total Debt/Total Assets (%) 17.79 23.83 -34% Not highly levered
Total Debt/Total Equity (%) 31.84 109.24 -243% Not highly levered
CSCO--- Accounting Observations
Generally…Low Valuation in Relation to Other Large Companies
Cash Cow…However…
Earnings Not Growing Very Fast Net Margins are Not Terrific Their Cash Flow May decline it they Continue to
Lease Don’t seem to know what to do with their Cash
Epilogue…