Financial Analysis for
Union Researchers
Tom Juravich
UMASS Amherst Labor Center
Why Do Strategic Researchers
Avoid Financial Analysis ?
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How Corporate Finance Typically
Used in Labor Movement
 The CEO is making $1.25 million, so you can
afford giving us a raise
 Your revenue is up 15%, so you can afford to
give us a raise
 Your stock price has gone up by 10%, so you
can afford to give us a raise
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Goals for this Session
 Demonstrate how all these uses of financial
analysis are incorrect
 Provide introduction to basic financial
analysis
 In process demystify corporate finance
 Begin process of self-study
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Our Approach
 Learn by doing
 No extensive hypotheticals
 Work through a real example (Verizon) using
information available to anyone online
 Model a method to use on your own case
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Three Basic Financial Skills
 Understanding basic financial statements



Income Statement
Balance Sheet
Statement of Cash Flow
 Working with key financial ratios
 Stock analysis
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What We Can Accomplish
 Assessment of overall financial condition
 How the company generates profit
 The relative importance of various segments
 An understanding of financial change over time
 Comparison with other firms and the industry
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What We Won’t Accomplish
 Not provide the basics of accountancy
 Not conduct a full blown financial analysis
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A Few Reminders
 Look at the forest not the trees
 Don’t get fixated on any one detail, especially one
you don’t understand
 Use your knowledge of the firm to understand the
numbers
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Finding Financial Information
 Readily available for publicly held firms


In 10-K reports
Many Secondary sources
 Yahoo Finance – basic
 Mergent – more detailed
 We will use Yahoo for financial statements
 We will use Mergent for financial ratios, segments
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Concepts and a Vocabulary
 Each financial statement contains specific concepts
and vocabulary
 Will focus on key concepts for each statement
 Get familiar with concepts before we get to the
numbers
 Key concepts will be bolded in the text
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Income Statement – What Is It?
 Also referred to as a profit and loss statement (P&L)
 Shows the performance of a firm over a period of
time (year/quarter)
 Provides insights into the operation of a firm
 A moving picture of a firm
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Income Statement – Basic Formula
 Revenue – Expense = Income
 What is Revenue?


Sales
Inflow of Resources
 What are Expenses


Expenditures
Outflow of Resources
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Income Statement – Gross Profit
 Revenue – Cost of Goods Sold (COGS) =
Gross Profit
 What makes up COGS?



Materials
Labor Costs
Anything directly involved in production
 COGS does not include all costs of doing business
 That’s why is call Gross Profit
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Income Statement – Operating Income
 Gross Profit – (Sales, general, and administrative
+ depreciation) = Operating Income
 What is SG&A
Sales costs
 Administrative costs
 Management costs
 What is Depreciation
 Cost due to wear and tear on equipment

 Operating Income a more fine-tuned measure
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Income Statement – Net Income
 Operating Income – Taxes = Net Income
 Everybody knows what taxes are
 Net Income is the bottom line of the Income
Statement
 A common financial measure
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Income Statement– Simple Example
I just bought some studio equipment to produce a CD. What would an
Income Statement look like?
Revenue
CD Sales
COGS
Studio Supplies
Studio Musicians
Manufacture of CDs
Gross Profit
SG&A
Administrative Staff Person
CD Give-aways
Depreciation
Studio Equipment
Operating Income
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Income Tax
Net Income
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Income Statement – Real Example
 Actual Income Statements are much more detailed


Categories are broken into sub-categories
Additional adjustments are made
 Begin by looking for key concepts
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Income Statement – Limitations
 Includes one kind of financial information
 What it doesn’t include:



Anything about debt
Anything about buildings or equipment
Anything about stockholders
 To get this information –Balance Sheet
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Balance Sheet – What Is It?
 A snapshot of a firm at one point in time
 Based on double entry accounting
 By definition a balance sheet must balance
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Balance Sheet – Basic Formula
 Assets = Liabilities + Shareholder’s Equity

Shareholder’s Equity is treated as if it were a
loan
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Shareholders Equity More Than it
Seems
 Also includes Retained Earnings





Funds a firm carries over to next year
Net Income - dividends paid to stockholders
Can be negative (loss)
One of the reasons the balance sheet
balances
Conceptually distinct from shareholders equity
– yet included in this section of balance sheet
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Balance Sheet – Detailed
 Assets
 Current Assets
Cash
Accounts Receivable
Inventory

Non current (Fixed)
Buildings
Equipment
Liabilities

Current Liabilities
Accounts Payable
Short-term Notes (less than 1 year)

Non-Current
Long term debt (more than 1 year)
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Balance Sheet – Simple Example
Let’s go back to my music example
 Assets

Current Assets
Cash -- Checking account balance
Accounts Receivable – What I’m owed for CDs
Inventory – Unsold CDs

Non current (Fixed)
Buildings – My barn studio
Equipment – Recording gear, instruments
Liabilities

Current Liabilities
Accounts Payable -- What I owe recording studio
Short-term Notes – Credit card balance

Non-Current
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Long term debt – Home equity loan
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Cash Flow –What Is It?
 Tracks the generation and use of cash in three basic
areas
Investing
 Financing
 Operations

 The least useful annual financial statement
 Quarterly statements more helpful
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Why Financial Ratios
 Limits to eyeballing financial statements
 Ratios combine one or more pieces of data
 In essence “normalize” data
 Useful in comparing across companies
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Key Financial Ratios
 No need to calculate by hand
 Many different sources
 Stick with one source – methods may vary
 Many different classifications and definitions
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Key Financial Ratio –Types
 Although there are many classifications, we will
explore ratios in four areas

Liquidity

Profitability

Debt Management

Asset Management
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Liquidity Ratio
Current Ratio
 Current Ratio = Current Assets
Current Liabilities
Accepted Standard: Varies by industry
 Low Ratio: May be unable to meet obligations
 High Ratio: Too conservative growth plan
 Loan rates often tied to maintaining a certain current
ratio
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Profitability Ratio
Return on Assets (ROA)
ROA = Income Before Taxes (Operating Income)
Assets
 Accepted Standard: Varies by industry and amount of
fixed assets
 Low Ratio: Poor use of assets
 High Ratio: Strong performer
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Debt Management Ratio
Debt/Equity
 Debt/Equity = Debt
Equity
 Accepted Standard: Less than .8
 Low Ratio: Too fiscally conservative
 High Rates: Too risky
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Asset Management Ratio
Interest Coverage
 Interest Coverage = Operating Income
Interest Obligation
 Accepted Standard: Varies by industry
 Low Ratio: Too heavily burdened with debt
 High Ratio: Too conservative in borrowing
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Financial Ratio Summary
 Current Ratio – High good to a point >
 Return on Assets (ROA) – Higher the better >
 Debt to Equity – Lower good to a point <
 Interest Coverage – Higher good to a point >
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Key Ratios – Competitors
VZ
Current Ratio
ROA
Debt/Equity
Interest Coverage
0.78
1.70
1.50
4.63
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0.66
4.69
0.71
6.36
S
1.27
(4.29)
1.16
na
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Why A Segment Analysis?
 Digs deeper into company operations
 Identifies where revenues and income are
generated
 Key in developing points of leverage
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Verizon Segment Analysis
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Verizon Segment Analysis
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Verizon Segment Analysis
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AT & T Segment Analysis
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AT & T Segment Analysis
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AT & T Segment Analysis
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Stock Analysis
 Often ignored in financial analysis
 Huge amount of materials available for self study
 Both data and analysts’ reports are readily available
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What are Analysts Saying?
 On a scale of 1-5, 1 = buy, 5 = sell
 VZ =
4
 T=
3
 S=
3
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What We Learned About Verizon?
1
2
3
4
5
6
7
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Materials for Assignment
 Already done the computer work and are providing
you with the following:
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Hoover’s Financial Statements
Mergent Financial Ratios (historical)
Mergent Financial Ratios on competitors
Segment Analysis (when available)
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Your Assignment
 Prepare a financial analysis presentation for your
company.




Overview of basic financial statements,
including historical analysis
Comparison with competitors
Segment analysis
Overall summary
 Remember it’s about the forest not the trees!!!
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