The Case Method

Looking at financial statements to make useful decisions / information.

When looking at Financial Statement, the key thing is to look for positive growth sales, margin, and net income.

Merchandise inventory – Bad asset. Money that is sitting there and it has not been sold. Inventory has challenges, needs to be taken care of, can be stolen, can become outdated (food, etc.). For technology, it gets outdates quickly. So inventory can be a real drain on your financial position.

Horizontal Analysis – Look at absolute amounts or % analysis.

The % increase is more important than the absolute dollar amount.

Sales & Gross Margin are key percentages.

Gross margin allows you to fund everything else that you do. (i.e. operating expenses).

A drop in gross margin is not a good sign. You want to increase or be stable.

Cost of goods sold should not go up, not a good thing.

Increased sales decreased receivables – This is a good thing, that means they are getting cash and companies need the cash to operate.

Ratio Analysis

- Calculate them for liquidity

Current ratio should be 2:1

Below 1.5:1 is risky

* Quick (Acid Test) Ratio include things that you can get cash for asap.

* Look for a 1:1

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* Accounts receivable Turnover Ratio

* Below 10 means you are slow getting your cash, not a good thing.

* Average days to collect receivables should be around 30.

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* Inventory turnover – depends on the company (i.e. supermarket should turnover really fast).

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* Average days to sell inventory – Also depends on the industry.

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* Longer term ratios-

Debt to Assets

Debt to Equity

# of times interest earned

Plant assets to long-term liabilities

* Inventory is a current asset, we anticipate that it will be turned over very quickly (also depends on the industry).

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* Bad asset – Costs money to have inventory. Must spend money to get it. Companies are frequently challenged with inventory....