Profitability and Financial Statement Analysis

Profitability and Financial Statement Analysis

Our focus this week can be summed up with the question: “What types of companies win in the most competitive environments?”

For our purposes, this is really a question about the factors that drive profitability. To answer this, we have to look at key metrics that emerge from the analysis of financial statements. However, because traditional accounting and management reporting systems don’t always provide us with the tools necessary to make real-time decisions, we also need to track the performance of our operations relative to the growth and profitability of our company.

By the end of the week, you will be able to:

• Describe the key factors that influence Profitability for companies operating in competitive markets
• Explain the influence of Capital Intensity in developing a strong moat
• Compare key profitability ratios used in Moat Analysis
• Warren Buffet on Circle of Competence
• We are delighted and grateful that Warren Buffet has personally granted permission to Jack Welch and JWMI to use the following video clip in our course.
• Buffet attributes his success in investing to leveraging his natural abilities and to staying disciplined in waiting for the right opportunity. Think about how his insight into his own “circle of competence” has guided his investment decisions, and also think about how a similar understanding of your own circle of competence can drive your investment and financial management success.

Required Activities

• Watch the Video Lecture and Experts of Practice
• Log on to www.Morningstar.com and visit the Salesforce.com site (Ticker CRM)

• Learning Journal

(Due: Sunday, Midnight of Week 8)

In Weeks 7 and 8, we discussed two topics related to Efficiency.  We first explored whether the stock market is efficient because everything that is known about a stock is already baked into the price.  We then argued that the companies most likely to win in highly competitive environments are those which are more efficient in driving profitability – something that is particularly true when operating highly capital-intensive businesses.

Find a WSJ article about a company that was able to exploit an inefficiency in the market to take the lead over its competitors.  You are looking for examples in which economies of scale, speed, cash flow or other economic or operational factors were leveraged to increase profitability.  Describe what the company did, and also argue whether the gains they made created a sustainable competitive advantage or just a temporary bump that is vulnerable to replication from other competitors.