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Financial Statements Analysis:
Shaw Communications Inc.
ACCT 1115 Section A08
29 November 2022
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Introductory Financial Accounting Case Study
What business is Shaw engaged in? What are Shaw’s two reportable business segments?
Shaw Communications Inc. ("Shaw") is a Canadian company founded in Edmonton, AB,
in the telecommunications business servicing Alberta, British Columbia, Manitoba, Ontario, and
Saskatchewan. It's one of Canada's most extensive Internet, Mobile and TV services providers.
Shaw's two reportable business segments include the following:
1. Wireline is any method of communication that involves the use of a wire. The term is often
used to describe phone lines but can also refer to computer networks or electric power lines.
2. Wireless technology allows data transmission without using physical wires or cables.
What is the purpose of risk management? In your own words define the Board of Directors’
responsibilities towards risk.
Risk management is identifying, analyzing, and controlling business risks. In other words,
it's managing risk to achieve the desired outcome. The purpose of risk management ensures your
company's long-term success by helping you identify, understand, and manage risks that could
affect your business. It's worth mentioning that the Board of Directors' responsibility towards
risk primarily oversees the risk management situation for the whole company. They declared that
their direct responsibilities include only two risk management steps: first, identifying inherent
risks; second, analyzing those risks that could potentially affect Shaw's business operating,
investing, and financing activities. The third step, controlling the business risks, is a delegated
responsibility to Management, who instead establishes convenient methods that manage the
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previously identified inherent risks. At the same time, the Board of Directors held responsible the
Audit Committee to supervise the whole risk management process. The Human Resources and
Compensation Committee ensures that incentive plans don't encourage risk-taking decisions
beyond Shaw's risk tolerance.
Specifically, the company recognizes the following risks associated with assets and
liabilities, and implements the appropriate risk management strategies:
1. Market risk. Market risk is inevitable due to changes in market prices, interest rates and
foreign exchange. They are dealt with accordingly (see succeeding items).
2. Currency risk. As most of the expenditures are incurred in US dollars and revenue is
generated in Canadian dollars, the company enters into forward contracts in respect to USD
to mitigate the risk of foreign currency exchange rates fluctuation.
3. Interest rate risk. The company periodically converts floating-rates bank loans
(unsecured loans and AR securitization) to fixed-rates instruments.
As at August 31, 2019, Shaw successfully fixed the interest rate for all its long-term debt.
4. Sensitivity analysis. There is no significant market risk associated with forwards contracts
(in accounts payable and accounts receivable accounts) with respect to foreign currency
exchange. This is attributable to the short-term nature of the accounts.
5. Credit risk. Such risk is mitigated through advanced billing, downgrade or suspension of
accounts that exceed credit terms and creditworthiness checks of customers via payment
practices assessments.
6. Liquidity risk. The company monitors cash flow from operations, available borrowing
capacity and manages its long-term debt maturity profiles.
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Was there a change in the share capital (i.e. shares) found in shareholders’ equity in 2019?
If so, describe the change.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended August 31,
2019
Attributable to equity shareholders
Equity
Accum. other
attributable
Share ContributedRetained
Total
comprehensiveTotal noncapital surplus
earnings
equity
(millions of Canadian
loss
controlling
dollars)
interest
Restated balance as at
September 1, 2018 4,349 27
1,632
(39)
5,969 1
5,970
Net income
731
731 2
733
Other comprehensive
(55)
(55) (55)
loss
Comprehensive income
731
(55)
676 2
678
(loss)
Dividends
(401)
(401) (401)
Dividend reinvestment
217
(217)
plan
Shares issued under
39
(4)
35
35
stock option plan
Share-based
3
3
3
compensation
Balance as at August
4,605 26
1,745
(94)
6,282 3
6,285
31, 2019
Changes in Shaw's total equity include the following:
As of September 1, 2018, share capital was 4,349 million Canadian dollars. 217 million
Canadian dollars were reinvestment in the dividend plan, which uses proceeds from dividends to
buy more company shares. Also, they were 39 million Canadian dollars in shares issued under the
stock option plan, which allows employees to buy Shaw's shares. As of August 31, 2019, share
capital increased to 4,607 million Canadian dollars. Total equity was 5,970 million Canadian
dollars as of September 1, 2018.
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Throughout the year, 678 million Canadian dollars were registered as comprehensive
income (net income minus other comprehensive loss), 401 million Canadian dollars were paid as
dividends, 35 million Canadian dollars came from issuing shares under the stock option plan, and
3 million Canadian dollars came from shared-based compensation. As of August 31, 2019, the
result increased Shaw's total equity to 6,285 million Canadian dollars.
Evaluate the trend in Shaw’s liquidity, using the current ratio. (Calculate the current ratio
for each of the years and comment what you observe.) Formula: Current Ratio = Current
Assets / Current Liabilities.
Year
2019
2018
2017
Current Assets
$ 2,216
$ 1,074
$ 1,123
Current Liabilities
$ 2,835
$ 1,615
$ 1,391
Current Ratio
2,216/2,835 = 0.78
1,074/1,615 = 0.67
1,123/1,391 = 0.81
Liquidity measures how quickly a company can convert its assets into cash. A high
liquidity ratio is essential to a company's financial health. The current ratio measures the amount
of current assets that can be turned into cash within one year—the higher the current ratio, the
better the company's liquidity position. The lower the current ratio, the more likely a company will
struggle to meet payments shortly. The general rule of thumb or benchmark for this ratio is 2:1.
The current ratio of 0.81:1 in 2017 is unfavourable; it can be interpreted that for every
$1.00 in Current Liabilities, the company had $0.81 in Current Assets to meet its obligations.
In 2018, the current ratio decreased to 0.67:1, which is unfavourable and was caused
mainly by a decrease in Cash and Accounts Receivables and an increase in the Provisions that are
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part of the Current Liabilities. The dramatic increase in provisions is attributed to employee
severance due to the restructuring that commenced in 2016.
In 2019, the current ratio increased to 0.78:1 is unfavourable, derived mainly from a
$1,062 million increase in the Cash account but affected by a $1,250 million portion of long-term
debt coming due within the year. There was an increase in cash and a decrease in the provision for
the fiscal year 2019. The decrease in provision is attributed to the employees who opted to rescind
or declined to accept the VDP (voluntary departure program) package, which resulted in the
recovery of $10 million.
Finally, having a current ratio below 1.0 is a concern; Shaw must take action to be able to
pay those short-term obligations by raising money or refinancing debt.
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Identify the cash flow patterns for 2019 and 2018. What do these patterns tell us about Shaw?
(Review the Statement of Cash Flows.)
2019
2018
Operating activities
+
$ 1,568
+
$ 1,353
Investing activities
Financing activities
+
$ (1,133)
$ 627
-
$ (1,176)
$ (300)
Increase(decrease) in cash
Cash, beginning of year
Cash, end of year
$ 1,062
$ 384
$ 1,446
$ (123)
$ 507
$ 384
Cash flow is a term used in accounting to describe the amount of money flowing into and
out of your business over time. Cash flow is the lifeblood of our business. Without it, you might
be unable to tell if you're making or losing money. If you have positive cash flow, you're spending
less than you're making, and that's a good thing.
In 2018 Shaw showed a cash flow + − − pattern for the Operating, Investing, and
Financing activities, respectively. We can interpret that cash flow from Operating Activities was
enough to support the 1,176 million Canadian dollar investments, which will result in profit growth
in future years. It's also worth mentioning that Financing Activities resulted in a 300 million
Canadian dollar outflow, primarily used to pay dividends. The cash account had an ending balance
of 384 million Canadian dollars.
In 2019 Shaw showed a cash flow + − + pattern for the Operating, Investing, and
Financing activities, respectively. We can interpret that cash flow from Operating Activities was
also enough to support the 1,133 million Canadian dollar investments, along with creditors, a 1,000
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million Canadian dollar long-term debt, partially financing Shaw's growth and shareholders. The
cash account had an ending balance of 1,446 million Canadian dollars.
In both 2018 and 2019, the cash account ending balance was positive, describing Shaw as
an overall 'successful' company. The distinction is that in 2019 Shaw can also be labelled as a
'growing' company.
Evaluate the trend in the company’s profitability by calculating the return on equity and
return on assets for 2018 and 2019. Formulas: ROE = Net Income / Average Total
Shareholders’ Equity; ROA = NI / Average Total Assets
Average
Net
Year
Total
Income
Assets
2019 $ 733 $ 15,039
2018 $ 33
$ 14,424
Average Total
Shareholders’ ROA
Equity
$ 6,128
733 / 15,039 = 4.87%
$ 6,082
33 / 14,424 = 0.23%
ROE
733 / 6,128 = 11.96%
33 / 6,082 = 0.54%
It was possible to register a Net Income increase of 694 million Canadian dollars from
2018 to 2019, caused mainly by Restructuring Costs reduction and a Loss on Disposal of an
Associate or Joint Venture, which negatively impacted the 2019 Net Income.
Return on assets (ROA) is an essential metric for evaluating a company's profitability. It
measures how much income you get from each dollar of assets. The higher the ROA, the better
the company profits from its asset base. Return on equity (ROE) is a measure of a company's
financial performance. This ratio measures how much profit a company generates relative to its
shareholders' investment; in other words, it measures the efficiency with which money is returned
to the investor. The higher the number, the better.
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In 2018, Shaw achieved a 0.23% ROA and a 0.54% ROE. In 2019, Shaw improved from
the previous year, attaining a 4.87% ROA and an 11.96% ROE demonstrating good profits due
to the company's performance.
For the return on assets (ROA) metric in 2019, we can interpret that Shaw earned a profit
of $0.0487 per every dollar in assets. For the return on equity (ROE) metric in 2019, we can
interpret that Shaw earned a profit of $0.1196 per every dollar in total shareholder's equity, in both
cases, better performance when compared to 2018.
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Prepare a common size analysis (also known as a vertical analysis) of the consolidated
statement of earnings for 2019 and 2018. What significant trends do you observe? What
reasons have been offered by management to explain the significant difference in profit/NI
between 2019 and 2018?
CONSOLIDATED STATEMENTS OF INCOME - VERTICAL ANALYSIS
Years ended August 31,
(millions of Canadian dollars except per share
2019
amounts)
Revenue (notes 22 and 26)
$ 5,340
Operating, general and administrative expenses
$ (3,186)
(note 23)
Restructuring costs (notes 13 and 23)
$9
Amortization:
Deferred equipment revenue (note 16)
$ 21
Deferred equipment costs (note 9)
$ (85)
Property, plant and equipment, intangibles
$ (974)
and other (notes 8, 9, 10 and 16)
Operating
income
from
continuing
$ 1,125
operations
Amortization of financing costs - long-term
$ (3)
debt (note 14)
Interest expense (notes 14 and 26)
$ (258)
Equity income (loss) of an associate or joint
$ 46
venture (note 7)
Loss on disposal of an associate or joint
$ (109)
venture (note 7)
Other gains (losses) (note 24)
$ 50
Income from continuing operations before
$ 851
income taxes
Current income tax expense (note 25)
$ 114
Deferred income tax expense (note 25)
$4
Net income from continuing operations
$ 733
Loss from discontinued operations, net of tax
(note 3)
Net Income
$ 733
2018
100.00%
$ 5,189
100.00%
59.66%
$ (3,132) 60.36%
0.17%
$ (446)
8.60%
0.39%
1.59%
$ 30
$ (110)
0.58%
2.12%
18.24%
$ (945)
18.21%
21.07%
$ 586
11.29%
0.06%
$ (3)
0.06%
4.83%
$ (248)
4.78%
0.86%
$ (200)
3.85%
2.04%
-
0.00%
0.94%
$ 32
0.62%
15.94%
$ 167
3.22%
2.13%
0.07%
13.73%
$ 137
$ (9)
$ 39
2.64%
0.17%
0.75%
0.00%
$ (6)
0.12%
13.73%
$ 33
0.64%
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Significant trends observed between 2018 and 2019 include the following:

A significant reduction of Restructuring Costs from 8.60% to 0.17% resulted in an increase
in Operating Income from Continuing Operations from 11.29% to 21.07%.

A 109 million Canadian dollars Loss on Disposal of an Associate or Joint venture caused
an increase from 0% to 2.04%. Despite this, Income from Continuing Operations before
Income Taxes increased from 3.22% to 15.94%.

Current and Deferred Income Tax expenses remained constant, resulting in a substantial
Net Income increase from 0.64% to 13.73%, a Net Income difference of 700 million
Canadian dollars.

The remaining elements in the consolidated income statement remained relatively constant.
According to Management, Net Income significant differences between 2018 and 2019
can be explained by considering the following arguments:

A 10 million Canadian dollar equity income increase from Corus' investment.

A 41 million Canadian dollar gain on the disposal of property, plant and equipment.

A 15 million Canadian dollar gain on the sale of the portfolio's investment.

A 102 million Canadian dollar tax rate change on deferred taxes.
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Calculate the accounts receivable turnover ratio for 2019 and 2018 and evaluate the result.
(Assume all revenues are credit sales.) Formulas: Accounts Receivable Turnover = Credit
Sales / Average Accounts Receivable. Average Collection Period = 365 days / Accounts
Receivable Turnover.
2019
2018
2017
Accounts
Credit
Receivable sales
$ 287
$ 5,340
$ 253
$ 5,189
$ 286
-
Accounts
Turnover
19.78
19.25
-
Receivable Average Collection
Period
18.46
18.96
-
The turnover ratio is essential regarding how quickly a company can collect its accounts
receivable; it determines how many times a company's accounts are sold and collected during a
given period. We observed a slight increase in Shaw's accounts receivable turnover ratio going in
2018 from 19.25 times per year to 19.78 times per year in 2019. This can be interpreted as a
modest improvement of a faster collection process, which is a good thing.
On the other hand, the average collection period transforms the previous ratio into a more
straightforward number that will be easier to understand. The result states the days required to
collect the account receivables during a year. Shaw's average collection period had a minor
reduction going from 18.96 days in 2018 to 18.46 days in 2019.
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Summarize Shaw’s accounting policy for inventories and identify the cost formula that is
used.
Shaw identifies four (4) kinds of inventories: subscriber equipment (DTH receivers),
wireless handsets, accessories, and sim cards. Management uses distinct valuation methods for
several types of inventories. DCTs (Digital cable transmissions) were previously classified as
inventory but are now identified as PPE due to the obsolete nature of the equipment. The company
recognized the change in the accounting policy in fiscal 2019 and has since followed the
appropriate recording procedure.
Subscriber equipment is measured at cost using the first-in, first-out (FIFO) method.
This equipment can either be rented out or sold. When sold, the revenue received is amortized over
time in accordance with the company’s performance obligation classification. On the other hand,
subscriber equipment is transferred to PPE and amortized over its useful life when rented out.
Wireless handsets, accessories and sim cards are inventories that are reported at lower of
cost and net realizable value. For these types of inventories, the weighted average method is
used for its cost valuation.
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Evaluate the trend in Shaw’s solvency, using the debt-to-equity ratio. USE THIS
FORMULA: Debt to Equity = Total Debt / Total Equity (Refer to Chapter 10 Notes)
The debt-to-equity ratio is a measure that shows how much debt there is compared to a
company's equity. It's important because it helps investors understand how secure the company's
financial position is.
Total Debt Total Equity
2019
2018
2017
$ 9,361
$ 8,461
$ 8,223
$ 6,285
$ 5,970
$ 6,194
Debt
Ratio
1.49
1.42
1.33
to
Equity
Shaw's debt-to-equity ratio had slightly increased from 1.33:1 in 2017 to 1.49:1 in 2019.
Meaning there is $1.49 of debt for every $1.00 of equity. When the ratio is greater than one, it
shows that the company is financed with debt.
A high debit-equity ratio is usually problematic as it signals high credit risk. However, it
could also mean that the company is growing and maximizing its financial leverage to generate
more cash flows for the company. Given the capital-intensive nature of the operations, the
company requires long-term financing to finance its capital structure. Therefore, it is
understandable that Shaw has a high debt-equity ratio as it relies primarily on debt financing.
Despite that, the increase in the net income compared to its debt-equity ratio is an indication that
Shaw can service their long-term debt and increase equity returns. When compared to the rule of
thumb that determines that the debt-to-equity ratio should not be greater than 2, we observed that
Shaw's ratio for 2017, 2018 and 2019 are all favourable because they are still less than 2, which
let us resolve that there's not a high risk associated.
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What value is property, plant and equipment initially recorded? How does Shaw
record borrowing costs (i.e. which financial statement will borrowing costs be under)? Which
accounting method does Shaw amortize/depreciate their relevant property, plant and
equipment?
Property plant and equipment are recorded at purchase cost. Direct labor and other costs
incurred in the construction and upgrade of assets, and the connection of new subscribers are
capitalized. Other capitalized costs include borrowing costs, which are further reflected in the
Statement of Cash flows under the financing activities section. Moreover, any costs incurred in
the retirement of assets, including disposal and site restoration are also capitalized.
On the other hand, routine repairs and maintenance costs are charged to operating expenses.
The company’s PPE is depreciated using the straight-line method. The estimates on the useful
life are reviewed regularly, considering industry trends and company-specific factors.
Which intangible assets of Shaw’s have indefinite useful lives? Which intangible asset is
amortized on a straight-line basis over their useful lives ranging from 4 – 15 years? How did
Shaw acquire this intangible asset? Which accounting method of amortization is used on
those Software assets?
The company’s intangible assets include broadcast rights and licences, wireless spectrum
licences, trademarks, brands, program rights, customer relationships and software assets.
Broadcast rights and licences, wireless spectrum licences, trademarks and brands represent
identifiable assets with indefinite useful lives. On the other hand, customer relationships (which
represent the value of customer contracts and relationships acquired in a business combination)
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are amortized using the straight-line method over its useful life of 4-15 years. Similarly, software
assets that are internally developed by and for the company, are amortized over their useful life of
3-10 years.
There are several items that make up revenue. Identify and define the types of revenues that
Shaw recognizes.
Revenue refers to the money you make from selling your goods or services. It's recorded
in your books, the amount of money you receive in exchange for goods or services you have
provided to your customers. As part of their policy, different revenue streams will be evaluated as
part of an integrated whole o package. Shaw disclosed this information in note 2, Basis of
presentation and accounting policies.
Shaw uses a Contract-based 5-step approach to determine their net position in the
contract; by responding to the following questions for each step, Shaw can decide if recognizing
revenue is appropriate.
1. Is there a contract with this particular customer?
2. What are the (performance) obligations established in this contract?
3. What is the price for the transaction outlined in the contract?
4. Is it required to allocate the transaction price?
5. Have the (performance) obligations been satisfied?
Shaw employs the following performance obligation classification:
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
Recognized over time: satisfied when services have been provided or products have been
delivered.

Recognized at a point in time: in the period in which customers used the service.
By following the previous mention 5-step approach, Shaw can recognize several types of
revenues consisting of:

Upfront fees:
o subscriber connection and installation fee revenue, customer premise equipment
revenue, and handset equipment revenue.

Related subscription

Service revenue:
o Cable, Internet, Digital phone, Direct-to-Home (DTH), and Wireless.
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Review Investments and Other Assets. Summarize the activity(s) which occurred in 2019.
Include any gain(s) or loss(es). Which financial statement(s) do gains, or losses get reported
in?
The purchase of Shaw Media by Corus Entertainment in 2016 generated cash and shares
(Class B nonvoting participating shares) inflow for Shaw Communications Inc. This gave the
company 38% ownership of Corus. It was agreed that a third of the shares were maintained and
rationed over three periods: 12-, 18- and 24 months post-closing.
By May 31, 2019, the Company sold all of its 80,630,383 Corus Class B non-voting
participating shares at a price of $6.80 per share. Proceeds, net of transaction costs, were $526
million, which resulted in a loss of $109 million. By the end of Fiscal 2019, Shaw no longer holds
any equity interest in Corus. All the losses and gains were reported in the Company’s Income
Statement.
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Overall, based on your analysis above, should your friend purchase Shaw shares? Explain your reasoning.
2019
Metric/Ratio
Operating income
from continuing
operations
$
2018
% or #
$ 1,125 21.07%
$
Interpretation
% or #
$ 586
11.29%
Improvement, from a significant reduction of Restructuring
Costs from 8.60% to 0.17% resulted in an increase in Operating
Income from Continuing Operations.
Net Income (Net
profit margin %)
$ 733
13.73%
$ 33
0.64%
Improvement, a Net Income increase of 700 million Canadian
dollars
Return on assets
(ROA)
-
4.87%
-
0.23%
Improvement, in 2019 earned a profit of $0.0487 per every
dollar in assets vs $0.0023 in 2018
Accounts Receivable
Turnover
-
19.78
-
19.25
Modest improvement on a faster collection process
Current ratio
-
0.78
-
0.67
-
$ 384
-
-
11.96%
-
0.54%
Improvement, in 2019 earned a profit of $0.1196 per every
dollar in total shareholder's equity vs. $0.0054 in 2018
$ 6,285
-
$ 5,970
-
Improvement, a Total Equity increase of 315 million Canadian
dollars
Cash end of the year $ 1,446
Return on equity
(ROE)
Total Equity
Improvement but still unfavourable when compared to the rule
of thumb (a ratio below 1.0 is a concern), Shaw must take action
to be able to pay those short-term obligations by raising money
or refinancing debt.
Cash flow pattern for the Operating (+), Investing (-), and
Financing activities (+), representing a successful and growing
company, with growth partially financed by creditors and
shareholders.
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Dividend yield
-
4.50%
-
4.37%
Debt to Equity ratio
-
1.49
-
1.42
Shareholder's equity
ratio
-
7.42%
-
-
Improvement, when compared to the rule of thumb (2% to 6%),
is considered a good dividend yield.
Modest improvement, favourable when compared to the rule of
thumb. Shows that there is $1.49 of debt for every $1.00 of
equity. When the ratio is greater than one, it shows that the
company is financed with debt.
A 7.42% ratio represents that Shaw has high debt, and this value
is away from the 50% optimum one. The result is primarily
caused by 1,251 million Canadian dollars of the current portion
of long-term debt.
Most ratios show a positive outcome, indicating improving performance relative to the previous period. However, some values
suggest otherwise.
Debt to equity ratio, when compared to shareholder’s equity ratio, shows that it could be a risky investment. The debt-to-equity
ratio reflects that the company has dramatically relied on debt financing. Consequently, the SHE ratio of 7.42% falls below the threshold
of 50%. This supports the claim that the company has taken out more loans to finance its operations. These could translate to a high risk
associated with the company’s capability to repay its debts.
The Current ratio will be a slight concern because even though it had an improvement from 0.67 in 2018 to 0.78 in 2019, it's still
unfavourable when compared to the rule of thumb (a ratio below 1.0 is a concern); Shaw must take action to be able to pay those shortterm obligations by raising money or refinancing debt.
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On the other hand, the high debt to equity ratio may not be a cause for huge concern as the
increase from last year was only marginal (1.42:1 to 1.49:1). Additionally, the increase in ROA,
in connection with accounts receivable turnover suggests that there is improvement in the
efficiency of collections and use of assets in income generation. If this persists, the company will
have no trouble in settling their liabilities. Prospective investors would also be delighted to know
that there is a sharp rise of a staggering 11.42% in ROE and a dividend yield of 4.50% from 4.37%.
These values indicate that shareholders get a decent return on their investments.
Overall, the company has shown a change for the better, caused mainly by a 13.73% Net
profit margin in 2019 vs 0.64% in 2018. This shows potential for Shaw as a currently growing
company.
Mainly, all the metrics and ratios have shown improvements between 2018 and 2019.
Based on the metrics, ratios and interpretations presented in the table above, we can suggest to our
friend that it's a good idea to purchase Shaw shares.