Anyone love analyzing financial statements and calculating ratios??? I am having some difficulty calculating and analyzing the ROE with the DuPont method. Can someone help?I have included my current calculations for the companies as well as the paper that goes along with it. At the end of the paper, in the appendices, is where the financials are located.
I've been at it for awhile now, but formulas and financial statements are a bit overwhelming!
RUNNING HEAD: Financial Statement Interpretation
1 Financial Statement Interpretation 1 Financial Statement Interpretation 2 Financial Statement Interpretation
Financial statement interpretation can be used for a variety of reasons from investors
buying stock to projecting next year?s sales. The analysis can be used across industries including
service, retail, and manufacturing. A variety of ratios can be found with financial statements to
show the stance of the company such as the current ratio, quick ratio, net profit margin, asset
utilization, financial leverage, and return on equity. Along with the variety of ratios, there is a
basis accounting must adhere to outlined with the IASB and FASB/GAAP. The three companies
discussed in this paper Alliance Data, Carrefour, and Procter and Gamble have differences and
possibly similarities for their strategies in managing their working capital. Lastly, the stance
companies would have from their given ratios will allow an understanding of how the variances
in the industries will correlate to differences in ratios.
Differences between Industries
There is a vast array of differences between the service, retail, and manufacturing
industries. Alliance Data is a service industry company located within the United States.
Alliance will not contain an inventory due to the service offered by the company such as card
services or additional services such as marketing. An advantage Alliance has is that they will not
have to create the service without a customer requiring the service. Additionally the location of
their company may not play a huge factor, however the skill set of their employee may be
specialized for their services. Finally the profit difference for a service industry earns their
revenue from offering their services. Financial Statement Interpretation 3 Carrefour is a multinational retail company coming in as the second largest retail group in
the world. Carrefour has a variety of differences from the service industry. Rather than a service
to sell Carrefour purchases their inventory from the manufacturer leading to needing a location
central to their customers. The skill set of their employees could be trainable. A retail company
such as Carrefour would make their earnings from selling the inventory they have on hand
purchased through wholesale to consumers with a markup to cover their costs.
The manufacturing industry has differences as well. Procter and Gamble begin by
converting raw materials purchased through suppliers into a product that they sell to a retail
company. Ergo P&G will have to maintain an inventory. The location of the manufacturing
plants can vary but will remain within a general location to distribution centers to allow for
cheaper and faster shipping. Labor would be able to be trained with some specialties throughout
the businesses. Although there are differences between the industries each can remain profitable
and be compared by measurements.
Different Measurement Conventions & How this Affects Presentations
Financial Statements address two matters; the general considerations underlying financial
statements, and the construction and content of financial statements. The essential accounting
concepts that must be followed are a reasonable presentation, additions, and evenness.
Fair representation refers to a few concepts. Maintaining compliance with IASs can go a
long way in the direction of accomplishing reasonable presentation. Disclosure beyond IASs
necessary if that can lead to a fair presentation. Finally, where no IASs exist then, a fair
presentation can be achieved by following enterprise stated accounting policies to provide
relevant, reliable, comparable and understandable information. Along with reasonable Financial Statement Interpretation 4 representation, there are a few growing concerns. The growing concerns of assumption are that a
company will continue existence for the conceivable future. Additionally, the administration
should review the state of enterprise from time to time.
Accruals and consistency bring to light a few concepts each. Accruals start with a basis
of accounting means that liability, expenses assets, equity, income are recognized when they
transpire and not when cash or its equal is or paid. The basis is defined so as to consist of
matching. Additionally, the matching concept is the costs in which must be set off in
contradiction of proceeds they have contributed. Consistency refers to the presentation and
arrangement of objects in the financial statements must be reimbursed using two concepts. A
substantial change in the operation of the business or an analysis of its financial statements
reveals that additional material is provided by offering objects in a different method or the new
IAS requires a change.
Liabilities and Assets must not be offset unless this is allowed or required by an IAS. Income
and expense items should not be compensated unless allowed or required by an IAS, or unless
the amounts involved are not material. Both are referred to as offsetting. Then there is
Materiality and aggregation which IAS1 requires similar items to be aggregated together, but
information that is material should not be aggregated with other items.
Finally, the usefulness of these conventions can provide principles for situations. The
conventions are of some help in dealing with unusual transactions or situations as they provide
some principles which can be applied to a particular transaction. They can help a user of
accounting information to understand detailed accounting entries ("Accounting," 2017).
Contrast IASB Basis for Accounting (IFRS) & FASB/GAAP Accounting Financial Statement Interpretation 5 The Financial Accounting Standards Board (FASB) makes it a top priority to improve the
process of financial reporting. The process is enhanced by creating standards that provide clear
and useful information that is relevant to the needs of investors and shareholders. FASB is
recognized by the Securities and Exchange Commission (SEC) as the designated accounting
standard setter for public companies. FASB operates as an independent, private-sector not-forprofit organization responsible for the establishment of financial, accounting, and reporting
standards for both private and public companies as well as not-for?profit agencies that follow the
Generally Accepted Accounting Principles (GAAP) (About the FASB, n.d.). The GAAP are ?a
group of accounting standards widely accepted as appropriate to the field of accounting
necessary, so financial statements are meaningful across a wide variety of businesses and
industries? (Accounting Standard, n.d.). These standards are used as guidelines by companies
preparing and presenting financial statements and information such as income, expenses, assets,
liabilities, etc. (Accounting Standards, n.d.).
Utilized in more than 110 countries, the IFRS Foundation focuses on governance and
oversight and operations. As an independent, not-for-profit organization, IFRS is a service to the
interest of the public by setting IFRS Standards by the International Accounting Standards Board
to be used by publicly accountable companies. The mission of IFRS is to develop standards that
satisfy the following criteria such as transparency is increased through enhancement of
international comparability and quality of financial information provided to investors
participating in the financial decision-making process. Accountability is improved through the
reduction of the gap between businesses and individuals entrusted with the money. Finally,
efficiency can be enhanced through investors identifying both opportunities and risks that will
improve the transfer of capital. Financial Statement Interpretation 6 Additionally, there are notable differences between IFRS and GAAP with the biggest
difference surrounding the rules that are followed by the two methods. GAAP follows a more
rule-based platform, where IFRS follows a principle route allowing for the potential of different
interpretations, and a better representation of the economics of a transaction. This difference may
lead to additional disclosures included in financial statements and might allow for fewer
exceptions than the Rules-based system followed by the GAAP (GAAP vs. IFRS, n.d.).
Investopedia highlights a few more differences between the methods including how inventory
costs are handled, as well as intangibles and write-downs. Intangible assets such as research and
development are only recorded under IFRS if it has the potential to accumulate economic benefit
or measured value, the GAAP on the other hand, recognizes these transactions at fair value.
Inventory costs such as LIFO are not allowed under the IFRS method, where the GAAP method
allows for LIFO and FIFO to track inventories. Finally, Inventories under IFRS can be reversed
in the future, whenever specified criteria are satisfied. Under the GAAP method, reversals are
prohibited. (Nguyen, n.d.).
Strategies for Managing Working Capital
Working capital management refers to a company?s managerial accounting strategy
designed to monitor and utilize the two components of working capital, current assets, and
current liabilities, to ensure the most financially efficient operation of the company. The primary
purpose of working capital management is to ensure the business maintains enough cash flow to
meet its short-term operating costs and short-term debt obligations (Investopedia). Net operating
capital captures multiple dimensions of firms? adjustments to operating and financial conditions.
Sales growth, an uncertainty of sales, costly external financing, and financial distress encourage
companies to pursue more aggressive working capital strategies (Highfield, Hill, & Kelly, 2010). Financial Statement Interpretation 7 Correlation has been found to show the quicker an account is paid; the better working capital is
managed and higher profitability results (Bigger, Gill, Mathur). Each of the three companies
Procter & Gamble, Alliance Data, and Carrefour all have unique strategies for how they manage
their working capital.
Procter & Gamble?s strategy for managing its working capital falls under the triangular
structure of being technical. This company very firmly relies on accuracy and honesty by
producing reliable and accurate reports to management, shareholders, creditors, government
entities, and all others. All of the managerial reporting of the working capital must be exact and
have accurate documentation and ethical evaluation/appraisal (P & G Our Values and Policies,
18-20). It is a financial requirement that all Procter & Gamble operations must comply with all
local and national laws relating to the accurate and complete maintenance of financial books and
records. Open innovation is allowing for the facilitation of financial information to be easier to
be communicated among top executives (Dodgson, Gann, & Salter, 2006). Procter & Gamble
sets a high level of internal controls for working capital by having company assets safeguarded,
financial reporting reflects actual business activity by complying with legal requirements, and
business operations are efficient and effective.
Next, is Alliance Data Systems in the service industry where they issue credit cards to a
wide variety of retailers. Their approach to managing their working capital is aggressive as their
aim is to maximize profits while also taking risks as they are also in the banking industry as 2/3
of revenue generated is from banking. The complete focus of their net working capital strategy is
to make a profit as they have a strong free cash flow of $1.3 billion in 2015 that is used to
repurchase stock to support the business growth (Alliance Data Systems 4-11). In some of the
credit cards, they issue to retailers; they do not offer an auto pay feature enabling Alliance Data Financial Statement Interpretation 8 Systems to earn a higher ROE from late fees charged. Lastly, this firm allows consumers to be
approved for a credit card at a higher interest rate and in turn never having a credit request put on
a customer?s records as a way to generate a higher income (Alliance Data Systems 4-11).
Lastly, Carrefour is a foreign retailer who sells a wide variety of products similar to that of
U.S. company Walmart and their strategy can be considered risky for a few reasons. First, they
have been maintaining a negative net working capital by being unable to meet short-term
liabilities with current assets. Debt-to-equity ratio has been increasing compared to other
competitors by financing capital using a non-interest bearing trade note and a liquidity and risk
ratio less than one (Akman, Irawan, Rosiana, Widya, & Wijayanto, 1-14). Carrefour?s main
strategy is to generate a high sales volume while maintaining a small margin as the net return is
about two percent. In regards to the operating activity, Carrefour kept increasing net fixed assets,
which was financed by short-term debt ultimately resulting in a mismatching long-term
investment and a short-term financing (Akman, Irawan, Rosiana, Widya, & Wijayanto, 1-14).
Ratios and Analysis
The current ratio measures how liquid a company is and their ability to pay short term and
long term financial obligations (Current Ratio, 2016). The larger the current ratio, the more
likely a company can meet its financial commitments (Current Ratio, 2016). A current ratio of
less than one is an indicator the firm is in poor financial health; however, it does not indicate the
company will go bankrupt (Current Ratio, 2016). In table 1, P&G (.995) and Carrefour (.773)
both had current ratios of less than one in 2015. While they improved from 2014, the ratios
indicate assets are not ideally liquid. In 2014, P&G had a current ratio of .937 while Carrefour Financial Statement Interpretation 9 was at a .759. A high ratio (over three), is not necessarily an indicator of high financial status for
a firm either (Current Ratio, 2016). When a ratio is this high, it indicates funds are not being
allocated efficiently and to the right places. In 2015, Alliance Data (2.536) had a ratio above 1
and lower than three indicating they are allocating assets and using funds appropriately. This is
an improvement from 2014, when the ratio was 3.831, indicating they were not allocating their
Similar to the current ratio, the quick ratio measures liquidity. The difference is the quick
ratio measures the ability to pay liabilities as they are due to only quick assets that can become
cash in 90 days (Quick Ratio, 2016). High quick ratios are most desirable indicating the
company has more than enough cash on hand to pay liabilities. Alliance Data had the most
desirable quick ratio in 2014 and 2015 with 3.831 and 2.536 respectively. In 2014, Carrefour and
P&G indicated quick ratios of less than one, .489 and .737 respectively. This mirrored their
performance in 2015 with Carrefour reporting a quick ratio of .448 and P&G reporting .812.
Both companies will need a strategy to have more quick assets to convert to cash when liabilities
Net Profit Margin
Net profit shows what percentage of every dollar received can be converted to profit (Net
Profit, 2016). Low-profit margins do not necessarily indicate low profit, and can relate to the
budget that the company has set (Net Profit, 2016). Carrefour, P&G and Alliance Data have net
profit margins that are less than ideal. They reported Carrefour (1.424%) and P&G (9.365%) in Financial Statement Interpretation 10 2015 and in 2014, Carrefour (1.791%) and P&G as (14.636%). Alliance data reported 9.401%
and 9.733% in 2014 and 2015, respectively.
The higher the asset utilization ratio, the more efficiently the business is handling assets
to obtain revenue and profit (Asset Utilization, 2016). In 2015 and 2014, Carrefour reported the
highest asset utilization ratio of 1.748 (2015) and 1.667 (2014). P&G reported .589 (2015) and .
558 (2014) while Alliance Data reported .287 (2015) and .261 (2014).
The degree a company uses fixed income securities like debt and preferred equity is called
financial leverage (Financial Leverage, 2016). High percentages in financial leverage indicate
high-interest rates and negatively affect the bottom line (Financial Leverage, 2016). Carrefour
has the highest financial leverage showing it is the least healthy in 2015 (4.225) and 2014
(4.476). P&G has the lowest percentage of the three companies in 2015 (1.053) and 2014
(1.061). P&G is most likely to have interest rates that do not affect the bottom line. Alliance
Data was in the middle of these companies with 2015 (2.518) and 2014 (1.756)
Return on Equity (ROE)
The DuPont model ROE helps investors break down and gain insight into not only the
capital structure of an organization but the quality of the business being performed and the
features that are driving the investment returns. The in-depth look includes calculation of the Net
Profit Margin to identify after-tax profits earned for each dollar of revenue (Kennon, 2016). Financial Statement Interpretation 11
Conclusion To summarize, financial statements help with analyzing the balance sheet and income
statement of a company. These statements also help to interpret the financial ratios of a business
which can help with the business evaluation, financial representations and also financial
forecasting. For these companies to meet their financial responsibilities and to support with
making a calculated decision, they must formulate a financial statement. The above analysis
helps gain a better understanding on how essential information is gathered from prepared
financial statements, and how the information provided can be utilized to analyze the company?s
performance, compare, interpret and make further decisions based on analyzed ratios. On the
other hand, the information that is provided in the financial statements is not a finishing point. Financial Statement Interpretation 12
References (2009). Our Values and Policies [PDF file]. Retrieved from
(2016). Alliance Data Systems: If You Don?t Like the Answer ... Just Change the Question. [PDF]
About FASB. (n.d.). Retrieved from http://www.fasb.org/cs/ContentServer?
Akman, Irawan, Rosiana, Widya, & Wijayanto (2010). Case 2: Carrefour, S.A.
Asset Utilization (2016). Retrieved from https://www.reference.com/business-finance/assetutilization-df7db79f270ebcac#
Biger, N., Gill, N., Mathur, N. (2010). The Relationship Between Working Capital Management
And Profitability: Evidence From The United States Working Capital Management,
2010(10), 1-9. Business and Economics Journal.
Current Ratio (2016). Retrieved from http://www.investopedia.com/terms/c/currentratio.asp
Dodgson, M., Gann, D., Salter, A. (2006). The role of technology in the shift towards open
innovation: the case of Procter & Gamble. R & D Management, 36(03), 333-346.
Highfield, M., Hill, M., Kelly, G. (2010). Net Operating Working Capital Behavior: A First Look.
Financial Management, 39(2), 783-805.
https://www.pg.com/images/company/who_we_are/.../values_and_policies907.pdf Kennon, J. (2016). The dupont model return on equity formula for beginners. Retrieved from;
Net Profit Margin (2016). Retrieved from http://www.investopedia.com/terms/n/net_margin.asp Financial Statement Interpretation 13 Nguyen, J. (n.d.). What are some of the key differences between IFRS and U.S. GAAP.
Retrieved from http://www.investopedia.com/ask/answers/09/ifrs-gaap.asp
Quick Ratio (2016). Retrieved from http://www.myaccountingcourse.com/financial-ratios/quickratio
Working Capital Management. Retrieved from
http://www.investopedia.com/terms/w/workingcapitalmanagement.asp Financial Statement Interpretation 14
Appendix A - Alliance Data Financial Statement Interpretation 15 Financial Statement Interpretation 16 Financial Statement Interpretation 17
Appendix B ? Carrefour Financial Statement Interpretation 18 Financial Statement Interpretation 19 Financial Statement Interpretation 20 Financial Statement Interpretation 21
Appendix C - P&G Financial Statement Interpretation 22 Financial Statement Interpretation 23 Financial Statement Interpretation 24 Financial Statement Interpretation 25
Appendix D - Tables Table 1
Calculations for Companies
Calculations Formula P&G
2014 Alliance Data (In
2014 Carrefour (In
Current Ratio Liabilities
Note. Annual Reports from all 3 companies were used to calculate financial statistics 0.759
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