Financial Statement Analysis- Part 1 -February 2022

Unknown: Hello everybody and
welcome. My name is Bennet Tchaikovsky, and welcome to
financial statement analysis part one. So my disclaimer and
copyright notice the Information and opinions in this
presentation are those of the author only, and not the
author's employers or affiliated organizations, including but not
limited to Irvine Valley College and the South Orange County
Community College District. The presentation is for educational
purposes only, and does not constitute any legal or
accounting advice whatsoever. This presentation is copyright
2008 2022 by Bennet Tchaikovsky, All rights are reserved any
distribution is strictly prohibited. So one of the things
that I try to do if I have the time and the bandwidth when I am
teaching, is to have my intermediate accounting
students, and or my managerial accounting honors students
complete a paper. And the general premise behind the
paper. And, and kind of the reason why I have them do this
is that when a student starts looking at publicly traded
companies, they're getting additional exposure to the
Securities and Exchange Commission's website, to look up
financial statements. And this is extremely important, because
if you were starting a job as an auditor, or as an analyst,
whatever it might be, you will be spending a lot of time and
you should be spending a lot of time on that website.

It's also
going to give something for the student to discuss during
interviews, I can't tell you the amount of feedback I've had from
prior students, when they're able to go through and say Yes,
I did a paper, comparing these two different publicly traded
companies, I really got a lot out of it. So and when you kind
of start talking about the paper on the interview, we'd say,
well, I chose these ratios. And this is, these are the different
ratios that I had to go through and compute. So it's something
that really gives a student an opportunity to, you know, use in
their later careers. We're also going to be using or my students
will be using Google Sheets or Microsoft Excel, I just prefer
Google Sheets, it's nothing against Excel, pretty much the
same thing.

But using collaborative sheets, especially
when you're going to be going in public accounting, when there
are a lot of collaborative sheets running around, because
that's really how most All work is getting done. And then also,
it's not just when you're teaching ratios, or financial
statement analysis, most students will just look at the
numbers. And they will just go through and you know, copy down
a ratio, it's not that that's not the way you want to do it,
you have to look at every individual company and see which
company is you know, what ratio is important to one company
versus another company, the ant the example that I continuously
we'll give, and we can just kind of take a little look at this
really quickly, is if I look at the Home Depot.

And if we go to
the Home Depot, and when we look at their quarterly report for
the Home Depot give you a great example. When we look at ratios,
one of the things that you're going to see is that there is a
ratio I go to investopedia.com which is a great website. So if
we say over here, a our turnover counts so receivables turnover,
what is the receivables turnover? It's how essentially
how efficient is a company in collecting its accounts
receivable. Another one is going to be inventory turnover ratio over here how to calculate
it. It's essentially going to be your I believe it's I want to
say it's you know, how quickly is it turn? How quickly are you
converting? you're calculating it is going to be the cost of
goods sold divided by the average inventory. So how many
times is your inventory turning over per year? And this is
something that's very important, especially if you're an electric
products retailer.

So if I give a student those two ratios, and
I say, Well, which one is better to use for the Home Depot? This
requires an additional step because most students, when they
learn this, they say, Oh, here's the ratio, I'm gonna go through
and compute it. When you're writing a paper, it's a little
bit different. Because when you're writing a paper, you're
really required to say, Well wait a second, which one of
these two items is more materially significant to the
company. And if I look at over here, well, inventory or
receivables is about 3.5 billion of 73 billion, roughly going to
be about maybe four to 5% of total assets.

But merchandise
inventories at $20 billion is a very significant amount of total
assets. So if we had to choose between the inventory turnover
and the accounts receivable turnover ratio, we would choose
the inventory turnover ratio because of the significance of
this from our quantitative analysis only. So again, this is
why when when you give a ratio to a student, or you can go
through and churn out a bunch of ratios, but when it really comes
to analyzing a company, you want to try to find things that are
going to be most relevant to the company. Another example while
we're here is when we look at the Home Depot, what you're
going to notice is they have debt, surprisingly, but they
have debt. And between their current installments of long
term debt of 2.4 billion and long term debt excluding current
installments of 36 billion, this is upwards of roughly about $39
billion of debt. Okay, so that's how much debt Home Depot is
taken on. So when we look at this taking on of debt, that
also kind of comes up to say, Well, is there a concern here
with can accompany pay interest.

And if we look at the ratio of
times interest earned. And when we look at times interest earned
ratio, what this tells us is how well, which is really I believe
that what you're doing is you're going through and taking
basically kaki calculate EBIT da, and then essentially going
through and comparing this to you know, how much coverage you
have or that ability to repay debt. So that's something that's
extremely important. However, Home Depot has debt. But if I go
and look at a company, like meta platforms, meta platforms, and if we pull
up their 10k, and I look at betta platforms, we go to their
financial statements, we look at their balance sheets, you do not
see any type of debt.

Okay, so over here, accounts payable,
partners payable, those are really payable, liabilities,
accrued expenses and other current liabilities that is not
debt. So a company like Facebook, that times interest
earned ratio is an applicable. So as we go through, and this is
really the importance of learning about, you know, as
we're going through and doing this is really seeing which
ratios are going to be the most important or meaningful to
accompany. And this is really, as a student, this is what's
extremely important that I really want you to leave this
class with is that when you're looking at financial statements,
you have to not just, you know, go through and compute ratios,
you have to be able to say, well, which ratios are most
meaningful for this particular company? Okay, so usually what I
will do in my classes is, I create a list of companies, what
I try to go through and do every semester is I try to find the
ones that are really distressed, either from a stock price or
something else just because I that's what I enjoy looking at,
you know, I can it's it's easier to do an analysis of somebody
that's healthy, but when you see somebody that's going to be a
little bit more distressed.

So I go out there and I choose the
different companies and what I will typically do is that the my
students will come over here and what they'll do is they'll take
a look and like go back over here. So right over here, what
I'll do is I will list out all these different And companies
and students will have the opportunity to go through and to
select them. So they'll select the company and that will be
their first responsibility to do, I usually will have them
like list out for different ones, just because in going
through and doing the company selections, there may be
different times where you'll basically we'll go through and
you'll see different things popping up. So when we're going
through and doing now here's here's the challenge when you
are looking at how to find a comparable publicly traded
company. So why do I want you to have to choose two companies?
Why is that important to me, is because if I look at a company
just on its own, that's not going to give me a really good
perspective, I have to look at it in the context of a company
that's in a similar industry.

Now, for certain companies like
GameStop, that's going to be a harder one to do. Why? Because
Gamestop has a lot of smaller little stores that are might be
stores within stores, but they have it's not something where
they're really comparable, one of my students is doing it right
now. She's using Best Buy. And so that's a good one to look at.
But when you look at some companies, there can actually be
kind of difficult to do. Because if you say like, well, Netflix
versus Disney, are they comparable? Well, I would say
that both of them produce original content that Disney
shows now on Disney plus, and Netflix has their obviously
their own platform.

But Netflix does not operate theme parks. Of
course, they've got squid games. Now that sounds a little dark.
But again, red light, green light, you know, hopscotch,
those fun games have taken on a whole new meeting because of
that show. But they do not yet have a theme park. So could you
compare Netflix and Disney? I don't really think it's a good
comparison.

What about Netflix versus Amazon? Well, we know
that Amazon has Amazon Prime, they recently I think are in the
process of acquiring MGM. So that kind of makes them somewhat
similar, but at the same time, does Netflix have grocery stores
or offer web services? And the answer is no, they don't offer
those those types of things. So when you going are going through
and trying to find a comparatively a comparable
publicly traded company, that is something that can be sometimes
challenging to do. But where is the best place for us to go to
and try to go through and look? Well, the first place we can go
through and look and this is why you know, looking at publicly
traded companies can be so valuable is we can come over
here let's take a look at our meta platforms. Okay, so and
let's go to be the 10 kg of meta, right? This is formerly known as Facebook,
right? So over here if we say competition okay. So right over
here Adria is our business is kept characterized by
innovation, rapid change disruptive technologies, we
compete with companies providing connection sharing discovery, we
face significant competition in every aspect of our business,
including but not limited to, basically over here like
alphabet, Google and YouTube, Amazon Apple bike dance,
Microsoft snap, Tencent, Twitter, Twitter.

So what you
kind of look at this over here is that these are the this is
where you would really want to start in terms of trying to find
the competition, because as a publicly traded company, when
you file your 10k, you have to talk a lot about your business.
And when you look at this over here, there's a lot of
information about about Facebook that can be found from this, and
this is yet again, another reason why I want you to you
know, if you're doing this on your own, or if you're, if
you're going through and taking my class, this is really why I
want you to go through and to do this because you're going to be
exposed to here's the competition.

Now for myself,
when I'm going through and doing this, I'm probably going to
choose Twitter to do the comparison. And part of the
reason is, is that Google has a lot more in terms of search
engines. And obviously with YouTube, I would probably would
want to kind of say that, that for Facebook. I would want to
make Twitter like a little bit. I think it's might be a little
bit of an easier comparison. But again, when you're going through
and one of the things that I'll ask you to do is as my student
is when you're going through and you know, can this is an example
is over here. So after your companies like you'll find need
to find a comparable public We traded company. So enter the
company here and explain why our wire wire why not you chose the
company.

So what I would probably say here, is that for
my response, because I'm really going through and doing this
over here for Facebook, so Facebook, so my company selected
is meta platforms a comparable company would be
Twitter. Okay, and why is that company you know, Twitter.
Twitter has a lot, or Twitter has significant. Twitter is a
platform for social engagement, while Facebook has offers some
similar, some similar attributes. And its business
model. Additionally, Facebook identifies Twitter as a
competitor. Right? So you're never going to find two
companies that are exactly alike. But if I'm asking you to
go through for my class to go through and identify, Okay, why
did you choose this company? And you know, what's our excuse me,
you chose a company, one that I generally selected for you, but
you chose from that list, but when it comes to the
competition, I'm going to want to know well, why did you choose
it? Right? Don't say, well, both Facebook and Twitter banned
Trump. So that's probably true. But you can't say that it's
really more of like, well, the more proper answer, actually,
that is true.

But actually, which is very sad. Right over
here. I don't want to have speech 100 for anybody. Okay, so
over here, our business is going down over here is we look at
this. And it's identified as you know, as a potential as a
competitor to Facebook. So again, when we look at this,
over here, this is what we kind of want to try to go through and
say, so just kind of say, briefly why you think its
competitor. And then you can also say, Yeah, Facebook
identified Twitter as a competitor. So this is the first
part of the project, which is going to be identifying that
company, as well as going through and talking about why
did you select this as a comparable company, I do not
need if you're taking my class, I don't need a huge explanation,
but rather just a just something that's brief. So in any event, I
want to thank you for joining me here today. If there are any
other videos that you would like to see, please feel free to go
through and leave a comment.

Just one other thing is like if
you're not in my class, right? So if you're looking at this
video, and you're you're new to my channel, and you want to do
this on your own at home, please feel free to leave a comment.
And if you leave a comment, what I'll do is I'll I'm not going to
great your work, but I will say oh yeah, that's a really good,
that sounds like a good comparable company. So feel free
to go through and to do that. And if you want to kind of go
through and complete this project as I go through and do
it, you're more than welcome to do so. But thank you so much for
joining me today. Please don't forget to like and subscribe and
I look forward to seeing you on the next video.

Have a great day..

test attribution text

Add Comment