Greg Gleeson, CPA, CFA
Chief Operating Officer- GROW Partners, LLC
ggleeson@growpartnersllc.com
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Financial Health of Company
Track Record of Management
Independently Audited & Objective
Ease of Comparison Across Companies
Valuation of Company
Starting point for all Financial Analysis
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Backward Looking
Highly Summarized
Accrual Basis
Non Cash Items (“Stock Options”)
Subjective “One-Time” Charges
Accounting Elections can Make Comparisons
Difficult
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Financial Data Providers have Distilled (Bloomberg, Factset,
Reuters) many important facts
Financial Ratios provide important information and details,
without having to read financials themselves
There are many analysts out there who review info for you
…however…
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Strong fundamental research requires in-depth
review/knowledge of accounting
Ability to review/examine/digest financial statements is a
growing area of need in money management (e.g., forensic
accounting research, fraud specialization)
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Auditors Report
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Changes in Equity & Retained
Earnings
Footnotes
Management Discussion and Analysis
Ratios
Was an Audit Even Done?
Who are the Auditors?
Was it Prepared in Accordance with GAAP?
Is the Report Unqualified (i.e., Clean)
Is the report Qualified
Has the Firm Changed Audit Firms in Recent Years?
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Assets
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Current:
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Non-Current
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Cash/Inventory/Receivables
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Fixed Assets
Long term receivables
Intangibles – such as goodwill
Liabilities
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Current
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Non Current
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Accounts Payable
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Long-Term Debt
Equity
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Capital Raised
Cumulative P&L
Dividends Paid
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Revenues
◦ Accounted for an accrual basis
◦ Cost of good sold (inventory), can greatly distort
◦ Can be subject to management’s estimates of timing
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Expenses
◦ Accounted for on an accrual basis
◦ Can be subject management’s estimates of timing
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Other (One-time)
◦ Why does the company have one-time charges?
◦ Are “one-time” charges routine at this company?
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Cash Flow From Operations
◦ Translates Accrual Basis to Cash Basis
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Cash Flow from Investing Activities
◦ Accounts for “big ticket” items that are typically capitalized
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Cash From Financing Activities
◦ Shows the sources of capital raising activities during the period
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Drills Down the Equity Section of the Balance
Sheet
Shows the Roll-Forward of Equity for Various
Types of Shareholders (e.g., common,
preferred)
Shows if There are Other Minority Owners of
Company Out There That You Need to Worry
About
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“Minimum” Color Required by GAAP
Audited
Provides Critical Information to Understand
Financial Statements
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Reader’s Digest of Financial Statements
Allows for Quick Comparisons against Prior
Periods and Peers
Widely Used Ratios can Measure Many
Dimensions of Financial Reporting:
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Additional Color Provided by Management
Can be Forward Looking
Unaudited
Can Highlight Items Not in the Financial
Statements
Key Statistics
52 Week Range
14.96-21.34
Avg Daily Vol (3 Mo)
38,579,652.0
Market Value (B)
Ent Value (B)
111.3
82.7
Cisco Systems Inc. vs. S&P 500 (Operating Basis)
1,600
11-Feb-2010 to 11-Feb-2013
Price (Local Currency)
30
28
1,500
26
Shares Out (M)
5,309
1,400
Dividend Yield
2.7%
1,300
22
Float
99.7%
20
Institutional
73.8%
1,200
Top 10 Inst Hldrs
22.3%
1,100
Analyst Coverage
39
1,000
Target Price
LT Growth Rate
Avg Rating
$22.89
10.9%
Overweight
(1.39)
24
18
16
14
900
12
4/10
7/10
10/10
1/11
Cisco Systems Inc. (Right)
4/11
7/11
10/11
1/12
4/12
7/12
10/12
1/13
S&P 500 (Operating Basis) (Left)
Source: FactSet Prices
Almost $49B in Cash and Growing
Low A/R (falling)
Leases (increasing)
Purchased Companies in Past
Took Cash, Haven’t Booked Revs
25% of Company Leveraged
Cumulatively, Have Been Profitable
Has Healthy Equity
Grew 12% over past 3 years
Grew 24% over past 3 years
Grew 10% over past 3 years
Grew 10% over past 3 years
Grew 3.5% over past 3 years
Grew 10% over past 3 years
Starting Paying Dividend
Collecting Faster than in Past
Extending more Credit (leases)
More Profitable than P&L Shows
Stopped Buying Companies
Slowed down Purchasing Own Stock
Increasing Dividend
Leases grew by 9.5% in 1 year,
Faster than revenues….
Past Due Increased by 43% in 1 year
Provides warning about
When Revenues Booked
CSCO
S&P 500
Diff
Notes
Valuation
10.70
14.17
-32%
Low Valuation
Price/Sales (x)
1.86
1.30
30%
High Valuation
Price/Book Value (x)
1.65
2.27
-38%
Low Valuation
Price/Cash Flow (x)
7.50
8.70
-16%
High Valuation
Enterprise Value/EBIT (x)
5.02
11.66
-132% Low Valuation
Enterprise Value/EBITDA (x)
4.01
8.53
-113% Low Valuation
Enterprise Value/Sales (x)
1.13
1.83
-62%
Low Valuation
Gross Margin (%)
60.43
31.09
49%
Good Margin
SG&A to Sales (%)
37.87
22.57
40%
High expenses
Operating Margin (%)
13.53
22.06
-63%
Net Margin (%)
Price/Earnings (x)
Profitability
17.46
9.23
47%
Good Margin
Return on Assets (%)
8.99
3.38
62%
Good Margin
Return on Equity (%)
16.32
15.52
5%
Good Margin
Efficiency
Revenue/Employee
0.69
690k/employee
Receivables Turnover (x)
6.63
Inventory Turnover (x)
11.58
How many times a year do you collect full A/R
How many times a year do you deplete
inv
Days of Inventory on Hand
31.53
Tight inventory
Payables Turnover (x)
21.21
Aren't sitting on bills
Days of Payables Outstanding
17.21
Aren't sitting on bills
Liquidity
Current Ratio
3.49
Quick Ratio
3.40
Have the ability to pay off liabilities 3.4x
Have the ability to pay off liabilities 3.4x (excluding
inventory)
Credit Analysis
EBITDA/Interest Expense (x)
21.84
12.85
41%
Interest not a concern
LT Debt/Total Capital (%)
24.10
36.02
-49%
Not highly levered
Total Debt/Total Assets (%)
17.79
23.83
-34%
Not highly levered
Total Debt/Total Equity (%)
31.84
109.24
-243% Not highly levered
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Generally…Low Valuation in Relation to Other
Large Companies
Cash Cow
…However…
Earnings Not Growing Very Fast
Net Margins are Not Terrific
Their Cash Flow May decline it they Continue to
Lease
Don’t seem to know what to do with their Cash