Chapter 12 COMPANY ANALYSIS: THE

HISTORICAL RECORD

• What are the components of a company analysis report?

• How do analysts evaluate the quality of a company’s management?

• How is the competitive position of a company within its industry evaluated?

• What is financial statement analysis?

Overview of company analysis• Overall objective of company analysis

• Typical report according to Graham and Dodd

– Description of company’s business

– Financial material

– Past stock price history

– Prospects for the company

Assessing the quality of management

• Stock price reactions to management changes

• The nature of management

– A definition of management

– Organizational performance

Figure 12.1 – Sunbeam’s Stock Price and Volume (6/3/96 – 8/31/96)

Figure 12.2 – Management Process

Four functions of management– Planning function

– Organizing function

– Leading function

– Controlling function

Evaluating management

– Age and experience of management

– Effectiveness of strategic planning

– Sound marketing strategy

– Adaptation to changes in the external environment

Competitive position within the industry– Past growth

– Adequate and appropriate financing

– Good relations with employees

– Positive public image

– Effectiveness of company’s board of directors

Competitive position of a company

• Why important

– Leading companies produce higher and more consistent earnings

– Everything else being equal, leading companies offer lower-risk investment prospects

Evaluating a company’s competitive position• Classifying companies within industry

groups

– Items to examine

• Revenues or sales

• Profitability

• Product line

• New products and product innovation

• Operating efficiency

• Pricing

• Patents and technology

Analyzing financial statements• Types of financial statements

– Income statement

– Balance sheet

– Statement of cash flows

–Market values (cash flows) versus accounting numbers

Reliability of accounting numbers and financial statements

• Financial ratios

– Liquidity ratios

– Activity ratios

– Leverage and coverage ratios

– Profitability ratios

– Ratios based on market values

Interrelationship among ratios

• Breaking down ROE (DuPont formula)

• Interpreting financial ratios

• Trend analysis

– Kohl’s

– Johnson & Johnson

– Sunbeam

Industry comparisons

• Some issues

• Different industries have very different ratios

• Many industries are far from homogeneous

• Many companies operate in several different industries

– Kohl’s versus Target

–Merck versus Pfizer

Figure 12.5 - Quarterly Receivables and Inventory Turnover for Sunbeam