Hello class,
In class today we covered several ways to dig into a company’s financials (see photo below, thanks Alexandra!). Various approaches and ratios were discussed to help you understand a company’s financials at a deeper level. For this week, please post what your takeaways from the lecture are – more so, comment on how you will seek to apply these learnings to your projects and what implications they may have for you as look forward.
As a reminder, coffee/office hours are being held this week for one-on-one appointments. Additionally, there are now sign ups for one hour group meetings on Friday.
Look forward to seeing everyone in class on Thursday.
Today’s lecture focused on underlying attributes of a financial statement. Last Thursday we went over financial statements and the basics of understanding them. With that basic information we had to select the most favorable company portrayed. From what was shown, it was easy to select companies based on what we learned. However, today we learned that to select a company intellectually, we must analyze more information than Assets, Liabilities, Expenses, and Profit. The crucial data needed for these decisions are the Return of Assets and the Return of Equity. For an example, a company that has a high ROA and higher ROE with low liability can be trusted and is considered sustainable. This information is very useful because my group and I will be able to read the financial statements of Johnson & Johnson. Being able to analyze what J&J is doing with their profits and assets and see what return they’re receiving will allow my team to better determine which of our ideas will create the best solution to allow J&J to expand and interact with a new market.
Being able to analyze a company’s financial statements is vital to actually being able to understand a company. The information that Professor Darwin went over was useful in that it all allowed me to see a more holistic view of the companies presented. Learning about the different usages for ROA, ROE, EPS as well as how these numbers can be misleading on the surface if you don’t know what components contribute to them will be a useful lesson to keep in mind. However, what stuck to me the most was how incomplete information can completely change how people view a company. Only having some of the information can lead to a completely incorrect view on how a company is doing financially. This was illustrated when Professor Darwin showed not only the income statement, but the cashflows for the companies in problem 8 on the quiz. I’ll be sure to keep this in mind for the future and gather all the relevant information in order to properly analyze a company.
Jason,
I also agree that taking into account all information is needed to properly analyze a company’s financial position.
Professor Darwin refers to this practice as “financial awareness”. Just because one ratio is higher in comparison to another company’s does not necessarily mean that company is better. It is essential to take a holistic approach and not get too fixated on one “great” ratio or a “great” company. For example, Professor Darwin told the class that a group of HP employees would rather work for Dell (their main competitor) opposed to HP after blindly analyzing their financial statements. The employees were shocked that they chose to work for their competitor. If I learned anything, it is that the brain is lazy and likes to jump to conclusions too fast. When looking at United Health’s financial statements, I will make sure to investigate further what is going on behind the displayed numbers by reading the company’s footnotes.
I agree that it can be very misleading if you don’t have full information about the components that make up the ROA, ROE, and EPS. It became apparent to me when completing the quiz because I only knew what the ratios were but was not too familiar with what went into calculating them. I initially assumed that a company with higher income and assets and lower expenses was the better choice. However, after reviewing it in class I learned that these numbers can sometimes be misleading without all the information.
The key takeaway from today’s lecture was that numbers are deceiving. My initial thought when choosing a company was to choose the company with the higher net income and with lower expenses. After the exercise, I learned that there is much more to each number. Just because one company’s net income is higher or their assets are higher doesn’t mean you would want to invest or work for said company. There are so many other factors to take into consideration. Having never taken accounting before, I was unfamiliar with ROA, ROE, and other accounting terminology. Now when I analyze Coke’s financials I can seek out and solve for the ratios (return on assets, return on equity, cost of liabilities, etc.) that will better tell me the company’s current and projected position in the market.
I’d agree with Logan, but in a slightly different manner. Instead of numbers being deceiving, I would argue that it’s actually not having all the information to paint a full, thorough picture. With each twist in the numbers, the counter-intuitive company began to look more and more valuable. It’s interesting how a little bit of key information can drastically change the “value” of a company.
My key takeaway from lecture was the significance of accurate financial statement analysis. Numbers are easy to manipulate and financial services can be deceptive if not analyzed correctly. Yesterday’s lecture further reinforced the need to study all aspects of financial statements from current liabilities to retained earnings, and to know the financial leverage factors of each company. Since I am taking my first accounting course now, I appreciated the insight that Professor Darwin gave into breaking up each financial ratio (such as ROA) into individual parts to understand the specific factors that are driving these ratios up or down. Problem 6 also highlighted another important element of bringing in outside information to analyze the financial statements such as the current state of the economy and economic forecasts. I will apply these key takeaways for my own group project to be better able to assess GE’s current economic state and identify ways they can grow and expand their healthcare business through innovative means.
I too have just started taking my first accounting class, and it was really fascinating for me to see how the different accounting methods that I am learning right now in 102a can be potentially manipulated into portraying the company into a more positive light than it actually is. Furthermore it was really interesting to see how by breaking apart the different components of a metric like ROE, we can really see how the company is performing. Previously, I have only separated ROE into its components to find missing variables in my finance class in a midterm or homework. This practical usage of the metrics is something I haven’t encountered before, so it is really cool to see something from the textbook being applied in real life.
In Tuesday’s lecture, we learned about how to analyze companies through its financials. Besides learning about how to interpret key ratios such as ROA, ROE and leverage, the biggest takeaway is that we should always look at a company’s financial data from a holistic perspective. No conclusion should be made depending on part of the information. The example of “Profit without Cash vs. Cash without Profit” really emphasized the point that in order to understand the financial statement correctly, we should always look for the computation methods such as the payment cycle in the notes rather than make assumptions ourselves. The numbers could be misleading and lead to wrong conclusions if we don’t understand how they are calculated.
I think today´s class was very important and useful for the real business world. We have to be aware and read the small letter in the financial statements. “The world is a deception”, that means that a company that looks profitable and doing well can be in a real bad financing situation if we look at its ratios.
The other takeaway that I think is key is to differentiate between good and bad financing and understand that certain level of debt can be good , because it can make you able to make a better return. However, it also important to be alert of what it is going to happen in the future in order to take the right financing decisions.
Today’s class was a great overview of some essential accounting concepts. I thought it was very interesting that Professor Darwin gave us that “quiz” during the previous class. Most of us took it at face value and evaluated the companies based on that criteria alone. It was a very important lesson. When evaluating financials, one must always keep the “big picture” in mind. For example, if the company is investing heavily in its growth, it might take on more debt. This will be extremely helpful when Team Coca-Cola analyzes the 10-Ks and 10-Qs.
Ratios can be a company’s best friend or worst enemy, depending on how they’re analyzed. If taken at face value, good ratios can certainly say wonders about the company, bad ratios will do the opposite. However, the issue is that ratios should NOT be taken at face value. In order for them to say something meaningful for any stakeholder, ratios need to be dissected into its components and each component needs to be evaluated. Only then can ratios establish a measure for meaningful comparison.
Ratios depend on company financials and financials depend on company performance. When introducing the new business model/product for UnitedHealth, my group and I will need to address how our idea will increase company performance and therefore its financials. Maybe it will increase sales, utilize assets more efficiently or need more debt. I’m thinking that my group and I should analyze UH’s return on R&D expenditure (if possible) so we can have a comparable to which contrast our product’s potential return on their R&D investment.
This particular lecture was a great review of many accounting concepts and highlighted certain misconceptions people encounter while analyzing financial statements. For example, higher liabilities shouldn’t always be cast in a negative light. A certain level of debt can be good while the company is in a growth stage, but it can be problematic with economic downturn. As my peers above have mentioned, it’s difficult to provide recommendations when you are missing key information / statements. Professor Darwin especially drilled down on how EPS is not an accurate measurement of company performance, as it doesn’t take into account how company assets are being effectively utilized.
Aileen- I definitely agree that context is key: in addition to conducting a comprehensive analysis of all Coca-Cola’s financial statements, we need to understand the context of the beverage industry to assess whether the company’s financial model is sustainable. It would also be helpful to understand the financial performance of other competitors in the industry. I found it particularly useful when Professor Darwin showed his slide of the four not-so-hypothetical companies: by examining the components of the financial statements and calculating the ROA and ROE for each of the firms, we were able to draw comparisons between the companies to assess their relative performance.
It was interesting to see how almost none of the responses on my quiz were correct. Yesterday’s lecture taught me that when it comes to choosing to invest in a business you can’t simply look at the profit margins or the growth rate of their revenue. There are many other factors to take into account such as the ROA and ROE, liabilities and how the company is valued. Some other notable lessons from yesterday’s class was that debt is not necessarily bad and if the bank is willing to loan a company money it means that the company is worth investing in and likely to pay back the loan.
Applying this to Fujitsu I am particularly interested in their R&D Expenditure and this notion of ‘measuring innovation.’ Perhaps looking through their financial statements our group can have a better idea of how to approach this challenge and pinpoint shortcomings in their financial model.
I came out of lecture feeling both confused and excited about new understandings of balance sheets. There was a lot of information to digest. I have not taken an accounting class.If I had I am sure I would have been able to more deeply comprehend the lecture. I was able to grasp the general concepts and feel like it is just a matter of understanding how to apply them. One take away that caught my attention was that fixed costs are good if you are looking at a bright future and variable costs are better to have if the economy is at a decline. The biggest take away for me is that at first glimpse balance sheets can be deceiving AND that we should appoint an expert on our team that can help guide our thinking. I hope to hone in on the skills taught in class yesterday.
Professor’s mention of the methodolgy of innovation assessment was thought provoking as one student suggested about creating new customers. I compeletly agree with this suggestion as innovation is about creating new frontiers. Especially with open innovation emerging as an important concept to consider when building a business model, ecosystems are being made where various industries interact in one platform. So, one company such as Apple is trying to build an ecosystem where industries of music, entertainment, education, communication and business are all in the system of Apple and can be seamlessly used by one customer. So customers who use a music product and service from apple which will be connected to other industrial products such as smartphones and laptops, they will prefer to buy smartphones and laptops from Apple so not only will Apple gain extra customers but they will be able to increase more of their product sales per customer, in the long term. However, this may lead to a monopoly of a few firms and high market share concentration in one as companies like Google, Apple and tech giants may control the platform and make their products more favorable in their territory. So, this may actually discourage innovation as monopolies have economies of scale and scope to launch products at a cheaper price but maybe not innovative.
I was glad after this class because I had the chance to see how the different ratios combine in order to give a picture about the company we are analyzing. I’m looking forward to see the financial statements of the company I’m working with and look at them with a critical eye, trying to understand how the company has been doing the past few years.
Today we went through basic accounting and especially key ratios. Eventhough I was familiar with all the ratios it was nice to refresh the memory and to see them again. The overall takeaway from the class was that many ratios can be deceiving by themselves and to make a good analysis of a company’s financials you will have to incorporate multiple ratios. One example is the ratio of earnings per share. This ratio alone is a terrible measurment if you don’t know how many shares there are or how much each share is worth. Going through all theese ratios again will benefit us when we are digging in to the financials of Wipro.
I tried to post on this blog yesterday but was unable due to technical difficulties.
Nevertheless, the lecture yesterday was a great experiment on one of the four founding principles of Haas-questioning the status quo. Normally, in accounting classes we have been taught that the EPS is the most important ration. However, while we reviewed the quiz in class, this was definitely proven wrong. We examined the ROA and ROE values and gross margin values and return on R&D are important as well. Class really taught me that you can’t just take whatever that is on the financial statement as the complete truth and that you really need to look into the footnotes.
The takeaway point of the lecture is that we should not jump to conclusions easily. Often times when given financial figures, we take them for granted and immediately make conclusions about the companies. Professor Darwin emphasizes the importance of breaking down the numbers and really trying to make sense of the business implications of the financial information given. It was a really great and useful lecture. Going forward, I believe that our group can really use the lecture as a guideline as to how we should analyze the company’s financial data. Furthermore, it will also be my personal guideline throughout my years at Haas and perhaps later in the future when I finally embark a career in business.
It was a very informative lecture with accounting skills. For me, I’ve taken basic finance classes without accounting, and it really gives me a light headache. But from what I understood, if I am an investor, I would prefer invest in companies with higher ROE. But if I am the CEO of the company, I would be more careful with ROA rather than ROE. It might help explain the power contest between shareholders and executives. Also, what could be related to Silicon Valley is the idea of Lean Startups by professor Steve Blank. For an Internet startup company, it is better to have lower fixed cost, that is, leaner inventories that might costs a lot of initial investment, especially with a decreasing economy. I could really understand why Lean Startup is a hot topic especially in this time period.
Tuesday’s lecture was a refresher of the key ratios and how you analyze the balance sheet. Many of us have taken accounting classes before but it’s always good with a reminder. When analyzing companies its important to not just focus on one ratio rather try to look at the big picture and use several ratios. It’s also critical to identify the components of the different ratios and how certain actions affect them. Professor Darwin showed us how deceiving ratios can be and how to avoid getting tricked.
Moving forward I feel comfortable that we have the right tools to analyze Wipro financial statements.