01 Jul COMMON SIZE STATEMENTS
COMMON SIZE STATEMENTS
Order Description
Details: Publicly listed companies are currently receiving considerable press coverage frequently linked to factors relating to their financial statements. They produce annual reports for the use of a range of interested parties, including existing and potential shareholders, suppliers, financiers, and regulatory authorities. Annual reports convey primarily financially-oriented information that is intended to shed light on organizational performance from a financial perspective. However, their utility is being questioned. Recent evidence suggests that annual reports may mask what may be otherwise considered to be the “true” state of affairs of a firm. With this in mind, financial statements may need to be read with care. Hence it is important that they are evaluated critically.
Variability in the prices of shares listed on stock exchanges around the world continues unabated. Some of that variability has been due to concerns relating to the degree of financial leverage used by organizations, liabilities classified as non-current rather than current, difficulties associated with raising capital, and the extent of opaqueness of corporate structures as well as the nature and
magnitude of debt reported in financial statements. Some investors are increasingly hesitant to buy stock as a result of these concerns. Other investors have lost their life savings in collapsed companies.
Required: Obtain the annual reports of the two ASX listed companies of Transurban Ltd https://www.transurban.com/345.htm and Toll Group Ltd https://www.tollgroup.com/annualreport.html for the period 2010 to 2012 inclusive. Reports can be downloaded from the corporate websites. Evaluate the annual reports from the perspective of investors in the firms. Prepare common size statements for a minimum of three years for the organizations and evaluate them for their information content. Assess whether the reports provide any red flags that may have provided signals of impending financial difficulties. Comment also on the qualitative and non-financial information contained in the reports and assess the extent to which that information facilitates a clearer understanding of the companies financial operations. Evaluate the notes to the accounts for information that may influence the manner in which the reported financial data may be interpreted. Finally, comment on the utility of annual reports and financial statement analysis in terms of their capacity to inform the decisionmaking processes of investors in these two companies.
Question analysis:
COMMON SIZE STATEMENTS ( 400 words)
· P + L
– Discuss how companies have improved performance relative to sales (i.e. internal
efficiencies)
– Compare to the other company and industry averages
? B/Sheet
– Discuss structure of company
– Discuss how financed etc
– Compare with the other company and industry averages.
? give Calculate steps of the three years annual report for each company. And then give 400 words analysis of common size statement.
? NB. All of the above discussion points and comparisons are to be applied for all the ratios listed above in bold.
? General Comments
Appendices should be used for fcommon-size statements
However, you can use charts, figures or tables in the body of your assignment to emphasise certain points.
Checklist of Caution Flags
Adapted from Understanding the Corporate Annual Report Nuts, Bolts, and a Few Loose
Screws (Fraser and Ormiston 2003)
Below is an abbreviated list of caution flags you may like to consider when preparing your financial
statement analysis.
CAUTION FLAGS INCOME STATEMENT
· Revenue and profit growing at substantially different rates or moving in opposite directions
· Large, unexplained reductions in discretionary items such as advertising, research and
development
· Profit margins shrinking or growing dramatically or moving in opposite directions
· Taking large, one-time (special) charges against earnings
· Changing accounting estimates and assumptions
CAUTION FLAGS BALANCE SHEET
· Reductions in the allowance for doubtful accounts when accounts receivable are increasing
· Sales and receivables growing at substantially different rates or moving in opposite directions
· Sales and inventories growing at substantially different rates or moving in opposite directions
· Excessive use of "other" for material, unexplained items
· Borrowings growing faster than assets being financed; debt rising when assets are decreasing
CAUTION FLAGS STATEMENT OF CASH FLOWS
· Failure to generate cash from operating activities
· Large fluctuations in cash flow from operating activities over time
· Net profit and cash flow from operations not tracking closely
· Net profit and cash flow from operations moving in different directions
· Positive cash flow from investing activities because company is selling off assets to generate cash
· Positive cash flow from financing activities for several periods possibly indicating borrowing
needed to offset lack of internal cash generation
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· Company highlights cash flow in shareholders letter, especially in same paragraph discussing
falling stock price
CAUTION FLAGS COMPREHENSIVE ANALYSIS
· Changes in top company management
· Key financial ratios indicating deteriorating trends and/or weaknesses relative to industry
competitors
· Cash flow from operations declining, negative, volatile, or not tracking with net income
· Lack of profitability in key operating areas
· Price to earnings ratio low relative to competitors
· Firms earnings less than after-tax cost of debt
· Declining operating profits when debt is rising
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