Annual Report Financial Analysis – Follow-up

11 Nov 2015 23:25
Tags annual_report financial_statements

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Back in August I posted a 4 part series blog on performing an analysis on the financial statements found in most Annual Reports or 10K filings. In that series, we categorized the analysis (using the standards taught in basic accounting classes) into 4 buckets; Liquidity, Profitability, Credit Risk, and Share Holder Value.

While these 4 categories are standard I find myself continually performing a secondary financial analysis for growth potential. As such I am now updating this series to include the 5th category of Growth and have also updated the excel template
for anyone that wishes to use it.

The new growth category is broken into 2 sections; Historical Growth and Future Growth. Historical Growth is a collection of trending data that used to be part of the Profitability & Shareholder Value analysis but I have since relocated them. The Historical Growth trends include:

  • Net Sales Growth Trend
  • Net Income Growth Trend
  • Dividends Growth Trend

The Future Growth analysis consists of only two measures. The first is just a % trend analysis of research and development costs and is somewhat self-explanatory. The second measure is a ratio called the Capital Expenditure to Depreciation & Amortization (Capex Ratio for short).

The Capex Ratio is calculated by dividing Capital Expenditures by Depreciation & Amortization and both values can easily be found on the Cash Flow statement.

Capex Ratio = Capital Expenditures / Depreciation & Amortization

Note: Some companies combine depreciation & amortization into one value while others list the two separately, for the items listed separately the formula would be:

Capex Ratio = Capital Expenditures / Depreciation + Amortization

The resulting ratio value then corresponds to growth
Value Meaning
<0.9 Assets are aging
0.9 to 1.1 Assets are being kept current (maintenance & modernization)
1.1 to 1.4 Assets are being procured for growth
>1.4 Assets are being procured for aggressive growth

Of course a one year analysis can be misleading so do your homework and look at a minimum of 3 years of data.

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