Introduction Optional Reading Workshop Content - Bivio

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Using MorningstarMorningstar combines Liquidity and Leverage into a single category called FinancialHealth.Log onto the Morningstar site. Use BBBY for the example company. Select Key Ratiosand click on the Financial Health tab.The top of the data table contains balance sheet data in a common size format based on apercentage of Total Assets. This format is useful for getting some insight into why AssetTurnover has been declining. Based on past experience my first reaction is to look forbig increases in intangibles (goodwill) to explain the decline.In this case there are no intangibles until 2004. Even then they are only 4 to 5 percentof assets. What does catch my eye though is the long term increase in Cash & ShortTerm Investments. A large cash balance increases Liquidity but it doesn’t generatesales. I am willing to accept this as the reason Asset Turnover has been declining.Now scroll down to the bottom of the data table to see ten years of data for the CurrentRatio, Quick Ratio and Debt/Equity. Morningstar chose to provide data for FinancialLeverage instead of Total Debt to Equity and/or Long Term Debt to Capital.The Current Ratio and Quick Ratio seem to be quite adequate. As noted yesterdaymanagement has slowed the payment of bills. That hasn’t had a noticeable impact onthese ratios. Anyone who is really interested can switch to the Reuters site and comparethe industry averages.Debt/Equity is zero. We already knew that from SSG Section 2C.Financial Leverage has been close to 1.5. This is excellent. Financial Leverage cannot beless than 1. It can be 10 or more for highly leveraged businesses such as banks. AnAppendix with more details about the calculation of Financial Leverage is attached to thismessage.Overall, Liquidity and Leverage are very good.Some people may prefer to look at Balance Sheet data in the conventional format withdollar values instead of percentages. In that case just click on Financial Statements andthen click on 10-Yr Balance Sheet.Using Reuters DataAs in the case of the Income Statement, Reuters provides a Balance Sheet that hassomewhat more detail than Morningstar. The added detail wasn’t needed for BBBY. Butkeep this mind for future studies.
Reuters also provides a summary of recent Financial Strength ratios.Open another instance of your browser and log onto: www.reuters.comEnter BBBY in the Quotes box and when the page opens click on Ratios. Scroll down tothe summary table of Financial Strength Ratios. This table provides a quick comparisonof the company, its Industry, Sector and S&P 500.Data for five ratios are provided. They include three of the four ratios covered byMorningstar plus Total Debt to Equity and Interest Coverage.Tomorrow we will conclude the workshop by looking at the Statement of Cash Flows
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Introduction Optional Reading Workshop Content - Bivio

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