Wednesday, December 14, 2011

Financial Statement Analysis: The Power of Visualization

In my previous post, I described how Valuation Tutor let you compare companies along multiple dimensions.  These include common size analysis, cost-volume profit analysis, the analysis of business efficiency ratios, as well as price ratios. Each of these contains further classifications.  For example, in common size analysis, you can see what happens if you scale by assets, by sales, by invested capital, by the number of employees, etc.  You can compare a company to its competitors, sector, industry, companies in major stock indexes, and to any subset of companies in our dataset.
The numerical presentation of the data, which can be copied into a spreadsheet, is important so that students to perform their own analysis.  Valuation Tutor also lets you visualize the data, which lets you pick out items of interest.  In fact, you can look at different dimensions and quickly discover the dimensions along which a company is outperforming or underperforming.  Let me illustrate.
 After you launch the software and download the current dataset, you can select a company.  For this illustration, I picked Target.  If you select Target as the stock to analyze, you see the following screen, explained below.

The top left are the set of dimensions.  I am conducting a common size analysis, scaling by total assets.  The table in the middle contains the calculations for Target; you can see there are multiple fields, e.g. Sales, Cost of Goods Sold, and so on.  The first field (in this case Sales) is plotted for Target vs. its competitors, and also stocks in the same sector and in the same industry.  The competitor chart has the sector and industry averages (the horizontal lines) so you can see the relative performance of these companies for this field (Sales divided by Total assets). If you put your mouse over the chart, you can see the corresponding numerical values; right clicking lets you bring up the SEC filing for the company and also gives you the matrix of numbers underlying the chart.  You can also copy the chart.

Sales/Assets is only one field.  If you  want to look at how Target compares on, say, Net Income scaled by Total assets, simply click on Net Income in the table in the middle to get:

These are comparisons of individual fields.  You can also look at all fields at once in an interesting way by selecting a different chart.  The following is a magnification of the chart that gives information for all the fields in the table:

Each bar shows the proportion of companies (in the same sector) that have a lower value than Target for that field.  Note that for some fields, a higher number may not be good, though this can be subject to interpretation. 

In future posts, I’ll illustrate other visualizations.  For now, let me note some important pedagogical considerations.  First, the visualization lets you discover things quickly.  An instructor can use this to find interesting stocks to discuss.  A student can use this to find an interesting stock to study.  Second, you can discover patterns.  For example, if you find that your company ranks poorly (or very well) on some dimension, you can dig deeper into the financial statements to see why.  Third, the process of experimentation, looking at different companies, looking at different calculations, builds a familiarity with the raw financial statements, calculations based on the reports, and a deeper understanding of how to use the information to come up with a conclusion or make a decision.


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