Financial Statements: Industry Comparison

Financial Statements: Industry Comparison

University of Phoenix

BSA 500: Business Systems I

Instructor:

May 28, 2007

Financial Statements: Industry Comparison

More often managers are exposed to financial data and the need exists to develop knowledge and understanding of financial accounting concepts and principals. Nearly all companies prepare financial statements of some type and the complexity of those statements will vary. The analysis and interpretations of financial statements is made easier by the preparation of financial reports that can be produced daily, monthly, quarterly, and yearly. The following paper is intended to be a comparative financial analysis of four publicly traded companies within the same industry as Riordan Manufacturing, Huffman Trucking, Kudler Fine Foods, and McBride Financial Services. For the purpose of this research paper an analysis of financial statements will include the balance sheet and income statements for each company. An analysis of financial statements must serve as gauge of overall health of a company.

Financial statement analysis focuses on one or more elements of a company's financial condition or performance with emphasis on four areas of inquiry with varying degrees of importance: liquidity and efficiency, solvency, profitability, and market prospects (Chiappetta, Larson, & Wild, 2002, p. 742). Before analytical comparisons or measurements take place understanding the building blocks of what financial statements represent is imperative.

Table 1 Building Blocks of Financial Statements

Liquidity and Efficiency Ability to meet short-term obligations and to efficiently generate

revenue.

Solvency Ability to generate future revenues and meet long-term obligations.

Profitability Ability to provide financial rewards to attract and retain financing.

Market Prospects Ability to generate positive market expectations.

Note. From "Fundamental Accounting Principles," by Chiappetta, B., Larson, K., & Wild, J. 2002, p.743.

Table 1 represents the four areas which should be used as guidelines to the evaluation of financial data. There may be other additional information that is relevant that may not be included on some financial statements but these building blocks will assist in the evaluation of financial statements. The balance sheet and income statement will offer valuable information and will assist in indentifying any potential financial problems with a company.

The company I choose that resembles Riordan Manufacturing is the Carlisle Companies Incorporated which manufactures and sells construction materials in the United States and internationally. Table 2 represents analysis of Carlisle Companies Incorporated balance sheet for a three year span.

Table 2 Carlisle Companies Incorporated Balance Sheet and Income Statement

Balance Sheet Analysis 2006 2005 2004

Current Ratio 2.096 1.774 1.699

Acid Test 1.212 .696 .834

Working Capital $511,555 $288,461 $268,247

Leverage .292 .387 .372

The increase in the current ratio that spans the three year period shows that Carlisle Companies Incorporated will have the ability to pay current obligations. The acid test does not include any inventory and still indicates they should be able to pay off their short-term obligations. The working capital is more of a dollar figure than a ratio of current assets minus liabilities. This can be used as a security blanket for any unforeseen expenses. The leverage ratio measures how a company finances their assets. The goal for this is to have your total equity higher than your long-term debt. The three year span indicates they do have more equity while paying down their debt. Table 3 is the analysis of Carlisle Companies Incorporated income statement which is a basic record for reporting a company's earnings. The interest coverage

Table 3 Carlisle Companies Incorporated Income Statement Analysis

Income Statement Analysis 2006 2005 2004

Interest Coverage Ratio 13.569 13.167 12.097

Gross Margin 2.423 4.127 5.315

Operating Margin 1.229 1.969 2.325

ratio is a test to see whether a company could have problems making their interest payments and a high ratio it typically better for bondholders and equity investors (1999). The interest coverage ratio for this company indicates there relatively solvent and will be able to generate future revenues and meet long-term obligations. Gross margin is a good measure of a company's efficiency in producing and distributing its products (1999). The three year measurements indicate that the need to investigate their efficiency in production or distribution as the numbers have decreased since 2004. The operating margin ratio measures the quality of a company's operations (1999). The three year span of measurement indicates a decreased operating margin and they may be losing out to their competitors.

The next analysis is a company in the same industry as Huffman Trucking and the company chosen was Landstar System Incorporated, Table 4. Using the same balance sheet ratios the current ratio shows that there was some fluctuation in the current assets and their current liabilities however this shows a slight overall increase. No acid test ratio was available due to no inventory shown on the balance sheet. The working capital also fluctuated during this time frame but still represents an overall increase from 2004. The leverage over the span indicates that in 2005 they accumulated long-term debt but in 2006 they had an increase of equity or paid down the debt. The income statement in Table 5 indicates that they can meet their interest Table 4 Landstar System Incorporated Balance Sheet and Income Statement

Balance Sheet Analysis 2006 2005 2004

Current Ratio 1.884 2.049 1.874

Acid Test No Inventory Reported

Working Capital $221,168 $314,305 $209,753

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