Understanding Financial Reports - Coursework Example

Understanding Financial Reports Teacher’s Affiliated Understanding Financial Reports Balance Sheet A company’s balance sheet is created using the formula, Asset = Liability + Stockholders’ equity. From this equation, we get Stockholders’ equity = Asset – Liability. Stockholders’ equity includes preferred stock, common stock, treasury stock, dividend, additional paid-up capital, other comprehensive income or losses and retained earnings (“Financial Statement”, n.d.). Preferred stocks are stockholders’ investment that has priority over common stockholders. It is recorded as par value. It receives dividends prior to any distribution made to common stockholders. Common stocks are also investment made by stockholders and is recorded as par value. Retained earnings are the portion that a company keeps once dividends are paid to the preferred stockholders. Large corporations hold a considerable amount of retained earnings. Capital surplus defines values created from stocks issued at a premium over par value. Other stockholder equity shows cumulative gains or losses that cannot be recorded on the income statement (“Financial Statements”, n.d.). Preferred Stocks The concept outstanding share is contributed to common stocks. They are owned by public as well as by the company employees. A company calculates its market capitalization by multiplying outstanding shares by their current market price. From this perspective, companies do not have outstanding preferred stock shares. Preferred stocks have characteristics of common stock and a bond. They are traded separately from common stock at a different price. Like a bond, preferred stock has fixed rate payment. These stocks do not have voting right. Treasury Shares Treasury shares are that share that once were outstanding shares, but later bought back by the company and decommissioned; they do not have voting rights and cannot claim dividend. Treasury share are created to boost up earning per share (EPS). This assignment uses Whole Foods Market from NASDAQ and General Electric Company from NYSE. Both companies report treasury shares but do not disclose the reason. Basic and Diluted Earnings Basic earnings per share (BEPS) implies the amount of a company’s profit that can be allocated to one stock. It is calculated using the formula, BEPS = (Net Income – Preferred dividends) / Weighted average number of common stock. Diluted EPS (DEPS) is calculated in those cases if a company possesses dilutive securities that can be converted into common stock. It is calculated using the formula, DEPS = {(Net income-Preferred dividend)/ Weighted average number of common stock – impact of convertible securities}. The General Electric reported Basic EPS = 1.50 and diluted EPS = 1.50 (“General Electric”, n.d.). The Whole food market reported Basic EPS = 1.56 and diluted EPS = 1.56 (“Whole Food Market”, n.d.). Discounted Operations Discontinued operations are those businesses that have been sold, abandoned or disposed. It can vary from a product line to an entire business. It is shown in the income statement after reporting income from continuing operations. The General Electrics has reported discontinued operations, but Whole food markets did not report any discontinued operation. Stock Compensation Plans Companies use stock compensation plans to attract executive and employees. It is an incentive given to the employees, so they work harder since they want their stock to rise in value. Compensation cost under the fair value method at the grant date is measured based on the values of the stock and is recognized over the service period. The same cost under the intrinsic method is the excess (if any) of the market price of the stock at the grant date. Income statements of General Electric (GE) and Whole food market (WFM) do not disclose stock compensation plans. Financial Ratios Profitability ratios. A company’s income statement shows four levels of profit. They are gross, operating, pretax and net profits. Once compared these profits with sales or revenue, it shows how much money the company made at different levels out of $1 sales. These ratios detect constant, positive or negative trend in a company’s earnings for a given period (“Financial Ratios”, n.d.). Gross profit margin = Gross profit / Revenue = (Revenue – Cost of revenue) / Revenue Net profit margin = Operating income / Revenue = (Gross profit – Operating expenses) / Revenue Return on stockholders’ equity = Net income applicable to common shares / Total Shareholders’ Equity – preferred stocks. 2013 2012 2013 2012 GE Revenue 146,045,000 146,684,000 GE Revenue 146,945,000 146,684,000 Cost of revenue 79,817,000 77,167,000 Gross profit 66,228,000 69,517,000 Gross Profit Margin 45% 47% Operating expenses 38961000 39729000     Net profit margin 19% 20% WFM Revenue 12917000 11699000 WFM Revenue 12917000 11699000 Cost of revenue 8288000 7543000 Gross profit 4629000 4156000 Gross Profit Margin 36% 36% Operating expenses 3746000 3412000       Net profit margin 7% 6% 2013 2012 2013 2012 GE Net income applicable to common shares 13,057,000 13,641,000 WFM Net income applicable to common shares 551,000 466,000 Total shareholders’ equity 130,566,000 123,026,000 Total shareholders’ equity 3,878,000 3,802,000 Preferred stocks 702,000 702,000 Preferred stocks 2,765,000 2,592,000 Return on stockholders’ equity 10% 11% Return on stockholders’ equity 50% 39% Both companies maintained stable gross and net profit margins during years 2012 and 2013. The GE’s gross profit margin was about 45%, which means that the company received 45 cents gross profit out of $1 sales. However, the company had about 20 cents out of $1 net profit for these years. Once compared these values to values calculated for WFM, we note that it made 36 cents gross profit and 6 cents net profit of $1 sales. The above calculations also demonstrate that WFM had higher unit cost of goods sold that that of GE. The Whole food market had about 4% -5% higher return on stockholders’ equity than the GE. High return on stockholders’ equity of WFM is attributed to company’s large preferred stock values. Liquidity ratios. Liquidity ratios show a company’s ability to pay its short-term liabilities using its current assets. It uses the concept that the company has liquid assets, which can quickly be converted into cash. That is why; the greater the coverage of short-term liabilities the better is company’s position with respect to fulfillment of short-term obligations (“Financial Ratios”, n.d.). Current ratio = Current assets / Current liabilities Quick ratio = (Current assets – Inventory) / Current liabilities Inventory turnover ratio shows how many times the company’s inventory has been sold for a period. It is an efficiency ratio that demonstrates how effectively a company converts its products into cash. That is why; it is better to have a high value of inventory turnover. Inventory Turnover = Cost of goods sold / (beginning inventory + ending inventory)/ 2. Inventory turnover of GE in 2013 = Cost of goods sold in 2013 / (beginning inventory of 2013 + ending inventory of 2013)/2. = 79,817,000 / (15,374,000+17,325,000)/2 = 4.88. Inventory turnover of WFM in 2013 = Cost of goods sold in 2013 / (beginning inventory of 2013 + ending inventory of 2013)/2 = 8,288,000 / (374,000+414,000)/2 = 21.00 2013 2012 2013 2012 GE Current assets 422,303,000 426,156,000 GE Current assets 422,303,000 426,156,000 Current liabilities 233,116,000 249,389,000 Inventory 17,325,000 15,374,000 Current ratio 1.81 1.71 Current liabilities 233,116,000 249,389,000       Quick ratio 1.74 1.65 WFM Current assets 1,980,000 2,103,000 WFM Current assets 1,980,000 2,103,000 Current liabilities 1,088,000 977,000 Inventory 414,000 374,000 Current ratio 1.82 2.15 Current liabilities 1,088,000 977,000       Quick ratio 1.44 1.77 Both companies maintained proper liquid ratios during years 2012 and 2013. Whole food market’s four time larger inventory turnover than GE is attributed to its nature of business Leverage ratios. A company’s assets consist of debt and equity. The leverage ratios give an idea about how company’s assets are arranged. It shows a company’s level of financial risk as well as if it is vulnerable to bankruptcy (“Leverage Ratio”, n.d.). Debt-to-assets ratio is called debt ratio and expressed using the formula, Debt Ratio = Total Debt / Total Assets. Since total assets consist of liability and equity, then the formula shows percentage of assets generated by debt. The higher value of this ratio indicates that the company is heavily leveraged and prone to financial risk. Debt to equity ratio shows what portion of equity and debt the company is using to finance its assets. Times-covered ratio is a solvency ratio and is expressed as a relation of Earning before income taxes to Interest expenses. Its value expresses a company’s ability to pay off its debts (“Leverage Ratios”, n.d). 2013 2012 2013 2012 GE Total assets 656,560,000 684,999,000 GE Total debt 525,994,000 561,973,000 Total debt 525,994,000 561,973,000 Total equity 130,566,000 123,026,000 Debt ratio 80% 82% Debt to equity 4.03 4.57 WFM Total assets 5,538,000 5,294,000 WFM Total debt 1,660,000 1,492,000 Total debt 1,660,000 1,492,000 Total equity 3,878,000 3,802,000 Debt ratio 30% 28% Debt to equity 0.43 0.39 The General Electrics (GE) in 2012 and 2013 had 2.7 – 2.9 times higher debt ratio than WFM. The debt ratio values of GE show that 80%-82% of the company’s assets come from debt while about 30% assets of WFM comes from debt. During the same period, GE had 4-5 times higher debt than its equity while WFM had 40% equity from debt. Times-covered ratio = EBIT / Interest expenses. 2013 2012 GE EBIT 26,267,000 29,788,000 Interest expenses 10,116,000 12,407,000 Times-covered ratio 2.60 2.40 WFM EBIT     Interest expenses 0 0 Times-covered ratio     The Whole food mart (WFM) does not report any interest expenses. The GE had about 2.5 time EBIT of interest expenses. Conclusion Footnotes explain where to find detail information about entries of financial statements. Financial statements record a company’s business activities. Accountants, firms, lenders, investors and government agencies use the information of these documents for different purposes. Financial ratios illustrate company’s current financial health and dynamics. The profitability, liquidity and leverage ratios show that GE and WFM financially are sound and stable. That is why; any company, including General Mills and Meiji can deal with them. References Financial Statements. (n.d.) Retrieved from http://accountingexplained.com/financial/statements/ Financial Ratios Tutorial. (n.d.). Retrieved from http://i.investopedia.com/inv/pdf/tutorials/financialratio.pdf General Electric Company. (n.d.). Retrieved from http://finance.yahoo.com/q/bs?s=GE Balance Sheet&annual Leverage Ratio. (n.d.). Retrieved from http://finance.yahoo.com/q/bs?s=WFM Balance Sheet&annual Whole Food Market, Inc. (n.d.). Retrieved from http://finance.yahoo.com/q/bs?s=WFM Balance Sheet&annual Appendix I GE Income statement Numbers are in thousand (“General Electric Company”, n.d.) Period Ending Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Total Revenue 146,045,000   146,684,000   146,542,000   Cost of Revenue 79,817,000   77,167,000   71,190,000   Gross Profit 66,228,000   69,517,000   75,352,000   Operating Expenses Research Development -   -   -   Selling General and Administrative 35,143,000   35,897,000   36,841,000   Non Recurring 4,818,000   3,832,000   3,930,000   Others -   -   -   Total Operating Expenses -   -   -   Operating Income or Loss 26,267,000   29,788,000   34,581,000   Income from Continuing Operations Total Other Income/Expenses Net -   -   -   Earnings Before Interest And Taxes 26,267,000   29,788,000   34,581,000   Interest Expense 10,116,000   12,407,000   14,422,000   Income Before Tax 16,151,000   17,381,000   20,159,000   Income Tax Expense 676,000   2,534,000   5,745,000   Minority Interest (298,000) (223,000) (292,000) Net Income From Continuing Ops 15,475,000   14,847,000   14,414,000   Non-recurring Events Discontinued Operations (2,120,000) (983,000) 29,000   Extraordinary Items -   -   -   Effect Of Accounting Changes -   -   -   Other Items -   -   -   Net Income 13,057,000   13,641,000   14,151,000   Preferred Stock And Other Adjustments -   -   (1,031,000) Net Income Applicable To Common Shares 13,057,000   13,641,000   13,120,000   Appendix II GE Balance sheet Numbers are in thousands Period Ending Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Assets Current Assets Cash And Cash Equivalents 88,555,000   77,268,000   84,501,000   Short Term Investments 43,981,000   48,510,000   47,374,000   Net Receivables 272,442,000   285,004,000   307,957,000   Inventory 17,325,000   15,374,000   13,792,000   Other Current Assets -   -   -   Total Current Assets 422,303,000   426,156,000   453,624,000   Long Term Investments -   -   -   Property Plant and Equipment 68,877,000   68,844,000   66,450,000   Goodwill 77,648,000   73,114,000   72,625,000   Intangible Assets 14,310,000   11,980,000   12,068,000   Accumulated Amortization -   -   -   Other Assets 73,147,000   104,959,000   113,422,000   Deferred Long Term Asset Charges 275,000   (54,000) -   Total Assets 656,560,000   684,999,000   718,189,000   Liabilities Current Liabilities Accounts Payable 58,360,000   56,779,000   29,546,000   Short/Current Long Term Debt 108,014,000   131,515,000   166,869,000   Other Current Liabilities 66,742,000   61,095,000   57,911,000   Total Current Liabilities 233,116,000   249,389,000   254,326,000   Long Term Debt 221,665,000   236,084,000   243,459,000   Other Liabilities 64,996,000   71,056,000   102,401,000   Deferred Long Term Liability Charges -   -   (131,000) Minority Interest 6,217,000   5,444,000   1,696,000   Negative Goodwill -   -   -   Total Liabilities 525,994,000   561,973,000   601,751,000   Stockholders Equity Misc Stocks Options Warrants -   -   -   Redeemable Preferred Stock -   -   -   Preferred Stock -   -   -   Common Stock 702,000   702,000   702,000   Retained Earnings 149,051,000   144,055,000   137,786,000   Treasury Stock (42,561,000) (34,571,000) (31,769,000) Capital Surplus -   -   -   Other Stockholder Equity 23,374,000   12,840,000   9,719,000   Total Stockholder Equity 130,566,000   123,026,000   116,438,000   Net Tangible Assets 38,608,000   37,932,000   31,745,000  Appendix III WFM Income statement Numbers are in Thousands (“Whole Food Market”, n.d.) Period Ending Sep 28, 2014 Sep 29, 2013 Sep 30, 2012 Total Revenue 14,194,000   12,917,000   11,699,000   Cost of Revenue 9,150,000   8,288,000   7,543,000   Gross Profit 5,044,000   4,629,000   4,156,000   Operating Expenses Research Development -   -   -   Selling General and Administrative 4,032,000   3,682,000   3,355,000   Non Recurring 78,000   64,000   57,000   Others -   -   -   Total Operating Expenses -   -   -   Operating Income or Loss 934,000   883,000   744,000   Income from Continuing Operations Total Other Income/Expenses Net 12,000   11,000   8,000   Earnings Before Interest And Taxes 946,000   894,000   752,000   Interest Expense -   -   -   Income Before Tax 946,000   894,000   752,000   Income Tax Expense 367,000   343,000   286,000   Minority Interest -   -   -   Net Income From Continuing Ops 579,000   551,000   466,000   Non-recurring Events Discontinued Operations -   -   -   Extraordinary Items -   -   -   Effect Of Accounting Changes -   -   -   Other Items -   -   -   Net Income 579,000   551,000   466,000   Preferred Stock And Other Adjustments -   -   -   Net Income Applicable To Common Shares 579,000   551,000   466,000   Appendix IV WFM Balance sheet Numbers are in thousands Period Ending Sep 28, 2014 Sep 29, 2013 Sep 30, 2012 Assets Current Assets Cash And Cash Equivalents 299,000   401,000   192,000   Short Term Investments 553,000   733,000   1,131,000   Net Receivables 366,000   339,000   329,000   Inventory 441,000   414,000   374,000   Other Current Assets 97,000   93,000   77,000   Total Current Assets 1,756,000   1,980,000   2,103,000   Long Term Investments 120,000   302,000   221,000   Property Plant and Equipment 2,923,000   2,428,000   2,193,000   Goodwill 708,000   679,000   663,000   Intangible Assets 81,000   65,000   62,000   Accumulated Amortization -   -   -   Other Assets 24,000   12,000   9,000   Deferred Long Term Asset Charges 132,000   72,000   43,000   Total Assets 5,744,000   5,538,000   5,294,000   Liabilities Current Liabilities Accounts Payable 698,000   651,000   580,000   Short/Current Long Term Debt 2,000   1,000   1,000   Other Current Liabilities 557,000   436,000   396,000   Total Current Liabilities 1,257,000   1,088,000   977,000   Long Term Debt 60,000   26,000   23,000   Other Liabilities 66,000   46,000   51,000   Deferred Long Term Liability Charges 548,000   500,000   441,000   Minority Interest -   -   -   Negative Goodwill -   -   -   Total Liabilities 1,931,000   1,660,000   1,492,000   Stockholders Equity Misc Stocks Options Warrants -   -   -   Redeemable Preferred Stock -   -   -   Preferred Stock -   -   -   Common Stock 2,863,000   2,765,000   2,592,000   Retained Earnings 1,668,000   1,265,000   1,233,000   Treasury Stock (711,000) (153,000) (28,000) Capital Surplus -   -   -   Other Stockholder Equity (7,000) 1,000   5,000   Total Stockholder Equity 3,813,000   3,878,000   3,802,000   Net Tangible Assets 3,024,000   3,134,000   3,077,000   Read More