Chapter 13

Types of Analysis

  • Intra Company Analysis:

    • Analyzes performance within the same company across different time periods.
    • Example: Comparing financial ratios of the same company over consecutive years.

  • Inter Company Analysis:

    • Compares one company against another (e.g., competitors).
    • Useful for investors to analyze options, such as investing in tech companies (Intel, Google, Microsoft, Apple).

Horizontal Analysis

  • Focuses on comparing financial data across periods (quarterly, yearly, monthly).
    • Base Period: The oldest time period used for comparison.
    • Analyzes changes in absolute dollars and as a percentage.
    • Example: Comparing total current assets from December 31, 2024, to December 31, 2025, showing a $290,000 increase.

Vertical Analysis

  • Analyzes financial statements by expressing each item as a percentage of a base figure (e.g., total assets or net sales).
    • Provides insights into the structure and proportions of financial statements.
    • Example: Assessing what percentage certain expenses are of net sales.

Ratio Analysis

  • Measures company performance using ratios to compare financial health across various factors. It can be broken down into:
    • Liquidity Ratios: Assess short-term financial health (e.g., Current Ratio).
    • Example: Nike's current ratio of 3.5 indicates they have 3.5 times more current assets than liabilities.
    • Solvency Ratios: Measure long-term stability and ability to meet long-term obligations.
    • Profitability Ratios: Indicates overall profitability based on net income.
Important Ratios to Know

  • Current Ratio: Current Assets / Current Liabilities

    • Example Calculations:
    1. If current assets = $2,000,000 and liabilities = $1,000,000, then current ratio = 20000001000000=2\frac{2000000}{1000000} = 2 (healthy).
    2. After purchasing $1,000,000 inventory on credit:
      • New Current Assets = $3,000,000
      • New Current Liabilities = $2,000,000
      • New Current Ratio = 30000002000000=1.5\frac{3000000}{2000000} = 1.5 (less healthy than before).

  • Inventory Turnover: Number of times inventory is sold within a period.

    • High turnover indicates efficiency and less time holding inventory.
    • Example: Discount retailers have higher turnover compared to luxury brands.

  • Accounts Receivable Turnover: Measures collection efficiency. Higher ratio indicates quicker collections.

    • Example: If a company collects receivables every 30 days, with a turnover of 12, payments are made promptly.

Key Takeaways

  • Analyzing Ratios: Higher ratios often indicate better performance, but must be understood in the context of the industry.
  • Management Impact: Changes in current assets and liabilities affect current ratios, requiring strategic management to maintain healthy ratios.
  • Database Resource: The SEC's EDGAR database can provide access to reports for all publicly traded companies for further investigation of financial statistics and ratios.