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Side by Side Common Sizing Analysis – Part 1

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Side by Side Common Sizing Analysis – Part 1

This module will teach the "How-to"s for common sizing and other techniques for the manipulation of financial documents.

Finance is for “Non-financial Managers” who want to understand key financial principles and apply them in a real-world context. Over the course of the program window, you will work your way through a series of nine modules that move from understanding basic financial principles to applying financial analysis and ratios to drive decisions. In addition, each module is capped with an ending self-evaluation to ensure that you have absorbed the following key learning objectives: + Understand the language associated with finance + Know how and when to use financial terms and analysis techniques + Read and assess company performance using financial statements + Recognize the link between organizational strategy and financial objectives + Use "the numbers" to your best advantage to make more informed decisions

Destrezas que aprenderás

Project, Financial Statement, Finance, Balance Sheet

Impartido por:

Thomas Smith
Assistant Professor in the Practice of Finance

Transcripción

All right, what are the powers of doing a common size analysis?

It's that you can look at two different organizations and

identify how it is that they're tagging the market.

Or how it is that they're approaching profit maximization.

In our example, we're going to look at Dell in 2010 and

we're going to look at IBM in 2010.

So I went and grabbed the financials for

IBM, now you'll notice that IBM's fiscal year ends in December.

And Dell's ends in January.

And that's okay, they're very very similar.

Here I've got information for

IBM and Dell for the same year.

2009-2010, the same period, January-December.

And I'm going to perform common sizing.

So I've already got the first row set up for you here.

For IBM we're dividing everything in cell B12 here by B39.

Which is, as you will notice, total assets, okay?

Right down there, total assets.

And then, we're going to do exact the same thing for Dell.

Now, as much as possible I try to match up where the assets

are in terms of their different lines for both Dell and IBM.

So, I'm going to copy these through, you just put your, your little cursor on

the bottom left-hand side, and the little cross hatch and do a double click there.

I'm going to do the same thing over here, do a double-click here.

All right.

See if you can do this.

And then I want you to take a second and look at this, and

identify where these two companies are dramatically different.

Take a moment.

So, maybe the first thing I would like you to notice here,

is that the relative size of Dell and IBM are quite astonishing.

So, total assets, the total assets for Dell,

are 33 billion, 33.6 billion.

The total assets for IBM are $109 billion.

So IBM is a little more than three times the size of Dell.

There's no way that ordinarily we will be able to compare these organizations, but

by engaging in a common size financial, we can do so.

Here we go.

Now, how are these two companies establishing their own financial make up?

Dell for example has 31% of its assets are in cash.

IBM only has 11.7% or 11.17% of its assets in cash.

Go down to non-current assets, right,

IBM has almost 12% of its assets are in

buildings, where Dell only has 8%.

IBM, 23.75% of its assets are in machinery, furniture, equipment.

Dell, almost nothing.

Total fixed assets IBM has 36.32%

of its total assets, are designated in fixed assets.

While Dell only has 13.82%.

These two companies, even though in 2010,

they were both offering personal computing solutions.

The two companies are radically different.

IBM has lots of infrastructure.

They are an incredibly large company.

They have lots of plants.

Lots of equipment.

Dell, much newer company,

has a significantly smaller portion of equipment and plans.

Dell takes computers that are put together by somebody else, so

they take components and put them together and ship them off.

IBM is building computing solutions for not only consumers but businesses.

The Department of Defense, NASA.

So what's happening is IBM, a much larger company,

they are engaging in a slightly different part of the computing industry,

so for all of their servers and data storage, they need space.

They need physical buildings.

And so even though IBM and Dell are similar in lots of respects,

they both offer computing, IBM is much different than Dell.

They've got lots of stuff in buildings, lots of stuff in machinery,

much lower percentage of their assets are in cash.

Why would Dell need to carry so much cash at this time?

If you read the notes section of the annual report in 2010,

the CEO identifies that Dell needs to grow by going out and

acquiring new companies, acquiring new specifications.

They need to really identify growth areas, and go out and buy assets.

In order to do that, you need to have cash.

So Dell is carrying lots of cash on hand.

And when you look at the portion of their balance sheet,

it's designated to goodwill, intangibles, right.

Dell is much larger in those areas.

Are there any questions about these things as you go through them?

Write them down, send an e-mail,

identify where your gaps are so that we can address them.

We're going to move on to a common sizing of the income statement and

a common sizing of a side-by-side income statement between IBM and Dell next.

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