1 Financial Statement Analysis Best Buy Co. Inc. By Sunil George Abraham Pin-Ying Chiang Instructor:...

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Financial Statement Analysis Best Buy Co. Inc.

By Sunil George Abraham Pin-Ying Chiang

Instructor:Prof. Brian Leventhal

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Income Statement Analysis Best Buy Co. Inc.

Our Main Objectives:

To study the trends for the Sale Revenue, Cost of Good Sold, Operating Expenses, and Net Income, and derive conclusions.

To review the Common Sized Income Statement and make intuitive observations.

Observe the various ratios associated with the Income Statement and study their impact on decision making.

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$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

1998 1999 2000 2001

Cost of Goods Sold

Revenues

Income StatementBest Buy Co. Inc.

Best Buy increase about 20 % of their revenues each year, and almost doubled their sales since 1998

Their COGS is in

a slower increasing trend

Trend Analysis: Revenue and COGS

84%of sales

82% of sales

81% of sales

80% of sales

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$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

1998 1999 2000 2001

Gross Profit

Trend Analysis: Gross Profit

According to data, their Gross profit was 16% of sales in 1998, and increase 1% to 2% each year!

Does Best Buy earning money? Yap~

Due to a lesser increasing in COGS, and favorable increasing in sales, and their 2001’s Gross Profit is almost twice as 1998’s.

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Trend Analysis: Operating Expenses

As the increase of sales, operating expenses would be expected to increase.

Best Buy control its expenses well because percentage of operation expenses were slightly increased each year.

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1998 1999 2000 2001

1998

1999

2000

200114% of sale

15% of sale

15% of sale

16% of sale

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Trend Analysis: Operating Income & Net Income

Both of operating income and net income are in the positive increasing trends

An increase trend of the return on sale is favorable and indicates Best Buy increasing its profitability

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

1998 1999 2000 2001

Operations Income

Net Income

ROS= 1.13%

ROS= 2.15%

ROS=2.58%

ROS= 2.78%

70%

2%

4%

6%

8%

10%

12%

14%

16%

1998 1999 2000 2001

Best Buy

Industry

0%

5%

10%

15%

20%

25%

1998 1999 2000 2001

ROE

Industry


Best Buy’s Return on Equity was lower than average 98,& 99, which means their assets are rely on debt. But in 00’ & 01 they issue more stocks, and get more finance from Stockholders.

Best Buy’s Return on Asset Ratio generally above the industry average, which means they are out performance for years.

Ratio Comparison: Return on Asset & Return on Equity

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Balance Sheet AnalysisBest Buy Co. Inc.


To study the trends for the assets , liabilities and Owners equity and derive conclusions.

To review the Common Sized Balance sheets and make intuitive observations.

Observe the various ratios associated with the balance sheet and study their impact on decision making.

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Balance Sheet Analysis Best Buy Co. Inc.

TREND ANALYSIS ( Assets )

0

100

200

300

400

500

600

700

(%)

1998 1999 2000 2001

Year(s)

Assets Trend Analysis

Current Assets

Property plant andEquipment

Other Assets

Increasing trend forCurrent Assets and this is favorable!!

Increasing trend forProperty plant and Equipment!!

Other assets too show an increasing trend.

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TREND ANALYSIS ( Assets )

Assets Trend Analysis

0

100

200

300

400

500

600

700

1998 1999 2000 2001

Year(s)

(%)

Current Assets


Other Assets

The rate of increase for the property plant and equipment is an indicator of the #of new retail stores opening up at various regions

In this chart we can analyze the rate at which each of the assets have increased. This also displays the trend analysis for assets.

The other assets have increased at a greater rate when compared to PPE and CA.Mainly goodwill and other assets.

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0

100

200

300

400

500

(%)

1998 1999 2000 2001

Year(s)

Liabilities and Owners Equity Trend Analysis

Current Liabilities

Long Term Liabilities

Contributed capital

Retained Earnings


TREND ANALYSIS ( Liabilities & Owners Equity )Increasing trend forRetained Earnings !!

Contributed capital goes down in 2000.

Both long Term and short term liabilities are increasing.

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Liabilities Owners Equity Trend Analysis

0

100

200

300

400

500

600

1998 1999 2000 2001

Year(s)

(%)

Current Liabilities


Contributed capital

Retained Earnings


TREND ANALYSIS ( Liabilities & Owners Equity )

Increasing trend forRetained Earnings !!

Contributed capital goes down in 2000.

Both long Term and short term liabilities are increasing.

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TREND ANALYSIS : Conclusions

The Assets of Best Buy Increased by

135%

The retained earnings forBest buy Increased by 326%326%and that’s a Comforting trendfor any investor.

All this growth makes me All this growth makes me so happy!!!so happy!!!

The current Liabilities have grown by 163% and the long term borrowing have also grown but the rise but the major source of the financing is from short term borrowing.

There is no denying to the fact that best buy is indeed a There is no denying to the fact that best buy is indeed a growing company.growing company.

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Common sized Balance sheet ( assets)

Assets ( Common Sized )1998

1%

16%

83%Current Assets

Property plant and Equipment

Other Assets

Assets ( Common Sized )1999

1%

82%

17%

Current Assets


Other Assets

Assets (Common Sized) 2000

2%

75%

23%

Current Assets


Other Assets

Assets ( Common Sized) 2001

60%

10%

30% Current Assets


Other Assets

The decrease in current assets is compensated by rise in Property plant and equipment and otherAssets.

Assets CommonSized

0102030405060708090

1998 1999 2000 2001

Year(s)

(%)

Current Assets


Other Assets That explains the trend in the Current ratio Going down!!!

Hmm..!! This Current Ratio

trend need some investigation!

That’s because Best buy’s Current Liabilities have increased at a greater rate as compared to their current assets!!

Current Assets decreasing over

the years!!

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Common Sized Balance Sheet ( Liabilities & SE)

L & OE (1998)

50%

14%

13%

23%

Current Liabilities


Contributed Capital

Retained Earnings

L & OE (1999)

20%

56%22%

2%

Current Liabilities


Contributed Capital

Retained Earnings

L & OE (2000)

4%

59%

28%

9%

Current Liabilities


Contributed Capital

Retained Earnings

L & OE (2001)

57%

25%

12%

6%

Current Liabilities


Contributed Capital

Retained Earnings

Liabilities & Owners equity

0

10

20

30

40

50

60

70

1998 1999 2000 2001

Years

(%)

Current Liabilities


Contributed Capital

Retained Earnings

Best buy seems to be moving towards long-term Borrowings since 2000 which can be shownIn the following chart. That also explains their declining Current Ratio.

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Ratio analysis

Current RatioCurrent RatioAcid Test RatioAcid Test Ratio

Debt to Equity ratioDebt to Equity ratio

ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !!AND HIGLY ESSENTIAL FOR DECISION MAKING !!

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Ratio analysis


Current ratio trend

0

0.5

1

1.5

2

1998 1999 2000 2001

Years

Ra

tio Current Ratio

Industry Avg.

For a company which relies on borrowing more in the form of current liability this is not a favorable graph.

Best buy is at a higher risk as far as its liquidity is concerned when compared to its industry competitors.

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Ratio analysis


Acid Test Ratio

00.1

0.20.3

0.40.5

0.60.7

0.8

1998 1999 2000 2001

Years

Ra

tio Acid Test Ratio

Industry Avg.

Maximum amount of Best buys sales are on credit and that explains the poor acid test ratio!

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Ratio analysis


Debt to Equity Ratio

0

0.5

1

1.5

2

2.5

3

1998 1999 2000 2001

Years

Ra

tio Debt Ratio

Industry Avg.

Best buys Debt to equity ratio is well above the industry average. It is obvious from the Balance sheet that equity financing is not the major source of financing for Best Buy

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Common Sized Balance Sheet

Time to draw Conclusions from theTime to draw Conclusions from the common sized balance sheetcommon sized balance sheet

Best Buys assets are most heavily financed with Borrowed amounts especially Current liabilities!!

Best Buy is exploring Long term financing in exchange for short term borrowing.

The current ratio , debt to equity ratio and the acid test ratio give an insight into the fact that best buy operates under higher risk as compared to its competitors!!

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Statement of Cash Flow Best Buy Co. Inc.


To study the trends for the Operating Activity, Investing Activity, and Financing Activity, and derive conclusions.

Observe the various ratios associated with the Statement of Cash Flow and study their impact on decision making.

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$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

1998 1999 2000 2001

Cash from OperatingActivity

Statement of Cash FlowBest Buy Co. Inc.

Trend Analysis: Operating Activity

Due to the positive Net Income, Best Buy has an increasing growth for Operating Activity

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Trend Analysis: Investing Activity

$22,299

$241,074

$416,334

$1,029,802

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

1998 1999 2000 2001

1998

1999

2000

2001

Note: All number are negative

Best Buy expended their facilities each year, and in 2001, they inquire other company, and increase outflow dramatically!

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$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

1998 1999 2000 2001

Cash from Operating Activity

Cash from Investing Activity


Trend Analysis: Comparison of Operating & Investing ActivityOnly 2001’s operating cash can’t cover the investing outflow, otherwise, the investing outflows are less then operating inflows!

From the SCF, we can find out that Best Buy acquire the firm- Musicland, and it is the reason their investment outflow increase a lot in 2001.

According to the cash from operation to capital expenditures ratio, Best Buy still has ability to pay their capital expenditures form operations.

Cash flow from operations to capital expenditures= 2.48

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2,175

149,214

395,168

217,754

$(600,000)

$(400,000)

$(200,000)

$-

$200,000

$400,000

1998 1999 2000 2001

Cash from FinancingActivity

Trend Analysis: Financing Activity


A great amount of outflow because Best Buy repurchase their outstanding stocks

Because of $165 million long term debt due in this year, Best Buy had a outflow for financing activity

Due to the Acquisition, Best

Buy issue new stocks as a source

for financing activity.

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Summary


$(800,000)

$(600,000)

$(400,000)

$(200,000)

$-

$200,000

$400,000

$600,000

1998 1999 2000 2001

Cash from FinancingActivity

Cash from InvestingActivity

Cash from OperatingActivity

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Significant other ItemsBest Buy Co. Inc.

Some Important Ratios

Inventory TurnoverInventory Turnover

Days Sales in ReceivablesDays Sales in Receivables

Price per Earning RatioPrice per Earning Ratio

Cost Of Goods Sold

Average Inventory

360 days

Accounts Receivables Turnover

Market Price per share of Common Stock

Earnings Per share

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Inventory Turnover

Inventory turnover Ratio

0

2

4

6

8

10

1998 1999 2000 2001

Years

Val

ue Inventory turnover

Industry Average

Measures how quickly Inventory is sold on Average. Measure of short term liquidity!!

Best buy has a very promising Inventory turnover ratio when compared to the industry average and which is a very good measure of best buy’s liquidity

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Day’s Sale in Receivables

Days sale in receivables

0

2

4

6

8

10

12

1998 1999 2000 2001

Years

rati

o

Days sales inrecievables Turnover

Industry Average

Measures how Quickly accounts Receivables are collected .

Best Buy is well below the industry average of 10.34 days and this is definitely a favorable liquidity measure!!!

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Price/Earning Ratio

Price/Earning Ratio

0

5

10

15

20

25

30

35

1998 1999 2000 2001

Years

Rat

io v

alu

e

Price/Earning ratio

Industry Average

Indicates the market Price of one dollar ofEarnings.

Best buy’s P/E ratio increased in 1999 but since then has gone down; this can either mean that the market price for the share has gone down or the earnings per share has increased. This can be easily determined by

Viewing the company’s stock pricesOver the 4 Year period.

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Best Buy Recorded no interest ExpenseBest Buy Recorded no interest Expense

No dividends PaidNo dividends Paid

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Comparison of Stock Performance

The Chart displays the stock performance of best buy in comparison to Circuit city and Dow Jones as the industry average

Slump in the stock prices during Jan 2001

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Income from operations Vs Stock performance

$-

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

$700,000.00

1998 1999 2000 2001

Years

Income from Operations

Income from Operations

• We Know that EPS=Net income/# of shares outstanding

• The market price and EPS are related by the Price/earning ratio

• This explains the slump in P/E ratio for 2000 and 2001 as the market prices went down and the EPS went up

Income from operations has an increasing trend and that in turn would mean a higher EPS.

The Market price goes

down

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Final AnalysisBest Buy Co. Inc.

Final Recommendation

Based on our analysis of best buys financial statements we determined that best buy is indeed a Best Buy.

Their Assets and Retained earnings have increased at a steady rate( refer Balance sheet analysis).

Their Net income and has been increasing steadily too .

From investors standpoint Best Buy has an above average performance as far as the return on stockholders equity and return on Assets are concerned. Both of these ratios have an increasing trend

Current Value: $ 65.4Intrinsic Stock Value: 42.09

1 Financial Statement Analysis Best Buy Co. Inc. By Sunil George Abraham Pin-Ying Chiang Instructor:...

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