Questions. - Questions. 1.What is financial analysis and how...

Chapter 1. What is Financial Analysis?Questions.

1.What is financial analysis and how can it be used for a recommendation for a company asking for a loan? An equity investment decision?

2.Give an example of an internal financial analysis decision. An external decision.

3.Assume you are asked to develop a financial analysis strategy for a 40 year old manager who is restructuring her 401K retirement portfolio. Identify the purpose of the analysis and key points needed.

4.You are asked to evaluate the chemical industry as part of a corporate overview of Dow Chemical. How would you go about this analysis?

5.What are quantitative financial analysis techniques important for both internal and external financial analysis projects?

6.Why is specific accounting knowledge important for external financial analysis?

7.What is comprehensive analysis and why is it a necessary step in the financial analysis process?

• Financial analysis is the use of financial and other information to make

recommendations and decisions. It is a six step process: Purpose, Overview,

Quantitative Financial Analysis, Detailed Accounting Analysis, Comprehensive Analysis, and Financial Analysis Decisions.

Credit Decisions: determine line of credit, interest rate, and other terms.

Equity Decisions: Buy/Sell based on earnings growth, and other ratios.

2 Internal Analysis: What Managers do to operate and prepare statements.

External Analysis: Six Step Approach by outsiders of a company, ratio analysis, etc.

• In making equity decisions for an older individual, dividend distribution and

low-risk may be more desirable and should be analyzed. Her criteria differ from younger investors who may have a focus on long-term appreciation as opposed to dividends and may care less about dividends.

• Fortune 500 industries are broken into 62 categories. Using Standard Industrial

Classification (SIC) codes. These should be used to designate Dow’s industry.Once accomplished, analysts should conduct a thorough analysis of competitors.

Knowledge about Dow should help answer questions such as:

What do the companies in this industry do?What is the specific industry?How concentrated is it (competition)?What factors are unique to the industry (legal)?How do US and global economic conditions affect the industry?

• 3 functions of Financial Analysis Techniques

1.Standardized Financial Info.a.Common-size analysis b.Return on Assets, etc.

2.Financial trends analyzed over time.a.ROA better or worse than last year.b.Are projected figures an improvement over current ones.Core Concepts version of Financial Analysis A User Approach 1e Gary Giroux (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

SOLUTIONS MANUAL • CHAPTER 1  2

Giroux • FINANCIAL STATEMENT ANALYSIS

• Ratios and other measures can be compared with direct competitors.
• Differences often arise as companies use different (legal) procedures to

prepare financial data (FIFO, LIFO, Avg. Cost, etc.). For this reason and the complexity of corporate environment, SPECIFIC accounting knowledge becomes important. Notes to financial statement help present specific data to be analyzed.

• The findings from the financial analysis steps are summarized in

Comprehensive Analysis, which stresses the most relevant information for determining whether or not to invest. This includes discussion of Red Flags and Green Flags.

Problems: Throughout the book most problems will focus on (1) the chemical industry using Du Pont, Dow and PPG, (2) the Hotel and Resort Industry, and (3) the automotive industry using Ford and General Motors.

Problem 1.1. Du Pont’s Corporate Overview and Business Strategy. The following are excerpts from various sources.

Industry: The chemical industry is global, with corporations producing both commodities and specialty products. A vast number of products are produced, with companies specializing in everything from bulk products with low margins to high-margin specialty products resulting from research and development. In the Fortune 1,000 34 chemical companies are listed (13 in the Fortune 500), with combined sales of $154 billion. Du Pont is the largest with revenues of $29 million. Economic conditions have a moderate effect on this industry, but have a differential impact on companies depending on specific products. Environmental regulations and other legal concerns have a major impact on this industry, again with differential effects by company.

From Hoover’s Company Capsule (www.hoovers.com)

• I. du Pont de Nemours is the largest chemical company in the U.S. Developer of

Lycra, Dacron, and Teflon, Du Pont has operations in about 65 countries. Its eight business units make products including coatings, nylon, specialty polymers, and pigments and chemicals.

History: From Hoover’s Handbook (1993, p. 249):

• I. Du Pont fled the French Revolution … [and] founded E. I. Du Pont de Nemours

[1802] and set up a gunpowder plant [in Delaware]. Within a decade the plant grew to be the largest of its kind in the U.S. … In 1902 Du Pont cousins Pierre, Alfred, and Coleman bought Du Pont and in 1903 instituted a centralized structure with functionally organized departments, an innovation that big business widely adopted. … In the 1920s Du Pont bought and improved French cellophane technology and began production of rayon. Du Pont’s of inventions includes neoprene synthetic rubber (1931), Orlon, Dacron, and many others.

Du Pont’s Web page

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SOLUTIONS MANUAL • CHAPTER 1  3

Giroux • FINANCIAL STATEMENT ANALYSIS DuPont is a science company, delivering science-based solutions in markets such as food and nutrition, health care, apparel, home and construction, electronics and transportation.

Two hundred years ago, DuPont was primarily an explosives company. One hundred years ago, our focus turned to global chemicals, materials and energy. Today, entering our third century, we deliver science-based solutions that make real differences in real lives. Look closely at the things around your home and, chances are, you'll find a DuPont imprint.

Our ability to adapt to change and our foundation of unending scientific inquiry enabled this two-century journey to becoming one of the world's most innovative companies. But, in the face of constant change, innovation and discovery, our core values have remained constant: commitment to safety, health and the environment; integrity and high ethical standards; and treating people with fairness and respect.

From 2001 10-K

DuPont was founded in 1802 and was incorporated in Delaware in 1915.DuPont is a world leader in science and technology in a range of disciplines including high-performance materials, synthetic fibers, electronics, specialty chemicals, agriculture and biotechnology. The company operates globally through some 22 strategic business units. Within the strategic business units, a wide range of products are manufactured for distribution and sale to many different markets, including the transportation, textile, construction, motor vehicle, agricultural, home furnishings, medical, packaging, electronics and the nutrition and health markets.

The company and its subsidiaries have operations in about 75 countries worldwide and, as a result, about 50 percent of consolidated sales are made to customers outside the United States. Subsidiaries and affiliates of DuPont conduct manufacturing, seed production, or selling activities, and some are distributors of products manufactured by the company.

In February 2002, the company announced the realignment of its businesses into five market- and technology-focused growth platforms and its plans for the creation of a Textiles and Interiors subsidiary. The

growth platforms are: DuPont Electronic & Communication Technologies;

DuPont Performance Materials; DuPont Coatings & Color Technologies; DuPont Safety & Protection; and DuPont Agriculture & Nutrition. DuPont will consider a full range of options to separate DuPont Textiles & Interiors from the company by year-end 2003, market conditions permitting.

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SOLUTIONS MANUAL • CHAPTER 1  4

Giroux • FINANCIAL STATEMENT ANALYSIS Sales in 2001 were $24, 726, down from $28,268 in 2000. Net income in 2001 was $4,339 million, up from $2,314; however, $3,866 million was a gain on the sale of Du Pont Pharmeauticals.

We faced the worst economic environment in two decades, unusually high energy prices and unfavorable currency exchange rates. … Overall misson is substantial growth— creating value for our shareholders.

From MD&A (2000 Annual Report)

Consolidated sales in 2000 were a record $28.3 billion, $1.4 billion or 5 percent above

• Specialty Fibers, Specialty Polymers and Pigments & Chemicals segments had the

most positive impact on volume.

Net income for the year 2000 was $2,314 million compared with $7,690 million in 1999.The decrease in net income principally reflects the absence of a $7,471 million after-tax gain recorded in 1999 of discontinued business …

Income from continuing operations was $2,314 million or $2.19 per share in 2000, compared to $219 million of $.19 per share in 1999.

Use this information (plus other internet searches) to write a one page Corporate Overview for Du Pont (one paragraph on industry and one paragraph on business strategy).

Answers May Vary Industry [size & relative significance, geographic presence (e.g., U.S., global …), current performance (impact of business cycle, etc.), future potential]

This paragraph may include:

-Chemical Industry is global -produces commodities and specialty products -Total Sales of Industry $154 billion -Economic Conditions have moderate effect on the industry -Environmental Regulations have major impact on industry -DuPont operates globally through 22 strategic business units -Wide range of products -operations in 75 countries Business Strategy [historical, major focus & operations, segments, objectives, forecasts]

This paragraph may include:

-DuPont is science company, delivering science-based solutions in markets such as food and nutrition, health care, apparel, home and construction, electronics and transportation.-Market Saturation info (pgph. 2 from “DuPont’s Web Page”) -adaptable -In 2002, DuPont realigned its businesses into growth platforms

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