How to analyze an income statement - Walmart example (case study)
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- เผยแพร่เมื่อ 21 ก.ค. 2024
- What is an income statement? How to analyze an income statement? This income statement tutorial shows you how to get started with reviewing the income statement of a company, the same way I would do it with participants in one of my finance for non-financial manager courses.
⏱️TIMESTAMPS⏱️
00:00 How to analyze an income statement
00:13 Income statement example
01:23 Analyzing revenue
05:27 Analyzing profit margins
08:04 How to analyze net income
10:46 Analyzing the effective tax rate
11:44 Income statement analysis summary
Here is Walmart’s income statement, or profit and loss statement (P&L) for the fiscal years ended January 31st, 2017, 2016 and 2015. 2017 is on the left, 2015 on the right. The income statement can be found in the annual report. There is a lot of information here, we need to set priorities on which items we are going to dive into, to get the most valuable use of our analysis time.
My proposal would be to first dive into the revenue performance, which seems to have dropped from 2015 to 2016, and then has come back up in 2017. What are the main drivers for revenue?
Next I would look into the margin performance. How have gross margin, operating margin, and net income developed in relation to the fluctuations in revenue?
As #retail is traditionally a fairly low margin industry, every penny counts. Net Income is almost 9 billion dollars lower than Operating Income, let’s review what is going on in the interest and tax lines.
Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how #financialstatements work in order to make better stock market investment decisions. Philip delivers training in various formats: TH-cam videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
Enjoyed this video on income statement analysis? Then please subscribe to the channel, and watch an example of a very different company: Alphabet Inc (Google) th-cam.com/video/ToE-oggQiqQ/w-d-xo.html
Do you know what bro??? change the narrative... sounds treble. bad accent, fast explanation without concentrating on main points... appreciate your hardwork, but please change the narrative
The best financial analysis I've seen so far. This video goes for deeper reasons and provides more details than others. Nice explanation! Thank you!!!!
Thank you very much for the kind words! I have done similar videos on cash flow. Hope you enjoy those too.
I understood everything before I watched this video, but you showed me how to be efficient with my analysis. Thank you. Great video
Thank you! I have a few more examples for you in my "How to read an annual report" playlist: th-cam.com/video/Kw-1nopchnA/w-d-xo.html
Thanks so much for that!!!!! I was looking long time for such an explanatory video!!!
You're welcome! Happy to hear hear you enjoyed it. :-) I have done a series on how to read income statement, balance sheet and cash flow statement for Alphabet Inc (Google) as well that might be useful for you: th-cam.com/video/ToE-oggQiqQ/w-d-xo.html
Thank you so much for sharing! I am a beginner and have recently bought some financial related courses on udemy, however, i still found it hard to understand thoroughly. This financial education channel on youtube is definitely way better and I have finally known how to read and analyze an annual report! thank you and looking forward for more coming videos!
Thanks for the kind words, phoebeee! :-) Wonderful to hear that. Here's the link to my playlist of finance case studies similar to the one you have just watched th-cam.com/video/PI9X5Ybek_E/w-d-xo.html From there, you can click on links (inserted as cards on the top right in the video screen) to get an explanation of the underlying concepts. Or just go from one video to the other based on the recommendations on the endscreen! On the Community tab of the channel, I also post some review/quiz questions that help you to think through some of the concepts and financial vocabulary. Enjoy & look forward to your comments.
Very Good Analysis, and explaination. Thank you for helping me in my finance class!!
You're welcome! Great to hear. If the cash flow statement is next in your finance class, then here is an analysis of Walmart's cash flow statement: th-cam.com/video/YiU_DXlLZ4s/w-d-xo.html
Yo I am watching this at 2am and this is on point! I’m watching all your videos and subscribing.
Welcome, Cristofer!!! Great to hear you enjoyed the video, I have plenty more finance case studies in this playlist for you: th-cam.com/video/PI9X5Ybek_E/w-d-xo.html
@@TheFinanceStoryteller thank you I’ll check it out. I really appreciated how you went into each section and broke it down even further and gave possible explanations as to why it could be decreasing or increasing. Also prioritizing what sections too look was key. Hopefully I’ll be able to read look over many financial statements and I’ll know how to efficiently use my time. Thank you once again.
Very good, thank you! Very handy
Happy to hear you enjoyed it! I have a cash flow statement analysis for Walmart for you too: th-cam.com/video/YiU_DXlLZ4s/w-d-xo.html
what website are you using for the income statement?
Thank You Sir, This is one of the coolest analysis. ❤
Love from Pakistan
You're welcome, my friend! Happy to hear that. I have done a few more videos like this on income statements, balance sheets, and cash flow statements, on my channel. Enjoy!
@@TheFinanceStoryteller will watch all step by step,,
And please share with friends and colleagues. :-)
at 6:30 when you were calculating the gross profit margin, I came across the same calculation as you; however, I noticed their percentages are on point of you just considered net sales, without membership and other income. Which way should we consider when we look at this?
Good catch, Abdullah! In the discussion of the Walmart income statement, I have tried to stick as closely as possible to the data provided by the company, which I what I narrate when talking about the increase in gross profit rate. With the benefit of hindsight, I agree with the definition that Walmart used. They took 120.061 as gross profit for 2017 (481.317 minus 361.256), and divided that by net sales of 481.317 = 24.9%. Other income does not have a cost of goods sold associated with it, so I would also exclude that from the calculation. You could argue that the same logic applies to memberships, I would have to dig into the specifics of how the Walmart memberships work (what does a client actually get in return for paying for a membership) to fully complete the reasoning there.
Intelligent presenter!!! If the long term debt was issued many years ago at considerably higher interest rates, can that amount be refinanced down to a more reasonable interest rate or would there be a prohibitive pre payment clause on that issued amount? Say the 5.1% for instance.
Excellent question, to which I do not have an answer. I agree that there is an incentive for a company to refinance if interest rates have dropped, but would assume the lenders have terms and conditions to (partially) protect them from this happening. I did see a line item called "early debt extinguishment charge" (one-off) in another company's annual report, but can't remember off the top of my head which one that was..... As a company, it is probably wise to build a long term relationship with both shareholders and lenders, and avoid unilateral actions that might upset these relationships.
In one of the p&l I was reviewing, I found that the company is reporting "increase/(decrease) in inventory" also as income. And in expenditure it has reported the raw materials consumption. I am confused why inventory information is added in p&l?
Well spotted! There are two ways to book the receipt and usage of raw materials:
1) The English/American way. Receipt of goods: Debit inventory $100, credit accounts payable $100. Usage of materials: Debit cost of goods sold (or "raw material usage") $80, credit inventory $80.
2) The French/Italian way. Receipt of goods: Debit cost of goods sold $100, credit accounts payable $100. Inventory left over (not consumed) at the end of the period: Debit inventory $20, credit cost of goods sold (or "increase in inventory") $20.
So in method 1 the inventory is on the balance sheet until used, in method 2 it is assumed used unless proven otherwise at the end of the period. Does that make sense?
This is pretty good! I'm a new junior executive and this is simple to understand 👍🏽. Thank you! Where can I good good case studies to work on?
Thank you for the feedback! Great to hear. For me, the best case studies are to download the annual report of a company that you are interested in, and try to "pick it apart". How does the "letter to the shareholders" in the front relate to the numbers in the back?
The Finance Storyteller okay great I will do that. Is all this free or do you have a website where we can do short courses? It would be great, since you know how to simplify things. Well at least for non financial executives
Hello Clara! All my TH-cam videos are obviously free, 48 videos in total at the moment, 4.5 hours total length. I have a website www.devroe.org with some blog articles, but not short courses. If you can recommend me to the Learning & Development staff at your company, and we can get a sufficient number of participants together, we could do a webinar, classroom session, or business simulation! If you would like to connect on Linked In, my name is Philip de Vroe.
HI there, I am trying to get into stock market trading and wanted to build a good ability to analyze companies fundamentally. I have a question; at 7:36 your calculations for Return on sales is made by dividing net income by net sales (Net Income/Net Sales). Am I mistaken but I thought Return on Sales was calculated by dividing OPERATING profit by net sales (Operating Profit/Net Sales). Correct me if I am mistaken. Thanks!
Hello Dakota! Unfortunately, the vocabulary and definitions in the field of finance and investing are not always synchronized, in other words different people can use the same term differently. I use Return On Sales in the way it is defined in the DuPont equation Net Income/Net Sales: th-cam.com/video/bhbDDSohJ84/w-d-xo.html I do like to look at the ratio Operating Profit/Net Sales as well, but would call that OP%. Some people would call it "Return On Sales (on Op Profit level)". Here's the link to my playlist of videos on stock market investing, hope there is some more useful information in there for you! th-cam.com/video/DcSGDuH0yso/w-d-xo.html
Awesome
Thank you! More financial statement case studies in this playlist: th-cam.com/video/PI9X5Ybek_E/w-d-xo.html
I got a quick question can you do a video on short term vs long term debt and on maturity if you have time
Thanks for the suggestion! Let me see if I can come up with something.
So of we forecast the revenue we can do do by using only the comparable store sales?
Hello Sinduja! Walmart offers the term “comparable sales”, which is sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions, as well as e-commerce sales. This is the most "apples-to-apples" comparison between time periods. However, if you want to forecast total revenue, you will have to take other revenue segments into account. For forecasting purposes, I would personally assume currency exchange rates to be stable for now (as we by definition lack information on their future development), and explicitly note that assumption as part of your modeling.
@@TheFinanceStoryteller Thank you. Much appreciated!
How do you define ROS% as the accepted definition for this term seems to be operating profit margin (EBITDA margin) or OM%?
I disagree with you on that. I think the accepted definition for ROS% is: Return on sales or net profit margin measures the net income earned for each dollar of sales. Return on sales equals net income divided by net sales. See my video on DuPont analysis: th-cam.com/video/bhbDDSohJ84/w-d-xo.html
Thanks for your feedback. It just may be my lack of familiarity with the terms or one of those examples of terms that is not uniformly described but please help me clarify. When investigating this term ROS in sources listed below they equate ROS% to "operating margin" or "operating income / profit margin". So they equate the term "operating income / profit" with "net profit". The latter term helps me to understand the correct value to use whereas the first makes me think of EBITDA. If you look at the Walmart data on your slide at about the 1:00 mark the line for Operating Income = EBITDA and the "net profit" line at the bottom is "consolidated net income". Two of the sources I used were wikipedia (which uses 'operating income' in their definition) en.wikipedia.org/wiki/Operating_margin and investopedia (which uses 'operating profit' www.investopedia.com/terms/r/ros.asp both of which are confusing and appear to wrong.
I use ROS the way it is defined in DuPont analysis (see my video on that), which to me is the only correct way. I disagree with the Investopedia article using Operating Profit (EBIT) for the ROS calculation, though I have seen some others doing this as well. Sadly, there is a lot of "non standard" use of terms going on.
The Finance Storyteller thanks for your clarification and confirmation that the definition of terms is not robust. One would expect that frequently used sources would be meticulous about getting their definitions correct but they actually sow seeds of confusion. Your videos on Du Pont analysis & others related were very helpful. I am grateful that I have found a reliable subject matter expert in you and it is accelerating my rate of learning although it is unfair to you to be burdened with so many basic questions. Is there an official accounting industry "dictionary" where a person can look up these terms & be confident that it is correct?
Thank you for your questions! They keep me thinking about how best to explain concepts, and provide me with some input on which topics could be worthwhile for future videos. I am also an active Quora user and writer (245 questions answered so far) and have found many qualified and inspiring answers from experts on all kinds of topics there. Through the Quora upvote/downvote system, there seems to be a selection mechanism to get more reliable answers to float up higher. In terms of a financing or accounting text, I went through the 900 page book "Principles of corporate finance" by Richard A. Brealey and Stewart C. Myers when studying in university, that's a very solid book that might be beneficial for you to read or have as reference guide.
where can you find a companies increased sales, and can you only find them on quaterly statements ? or can you get ones in between?
Hello Craig! Companies usually compare their sales in this current year quarter to the same quarter in the prior year. If you read any of the earnings releases that are currently coming out for Q2 of 2020, you will find comparisons to Q2 of 2019 for revenue, operating margin, etc. In the annual report, companies focus on the full year comparison (2019 vs 2018, for example).
@@TheFinanceStoryteller HI buddy, thanks so much!, also where is the best place to get the earning report quickly, i use investing.com but waiting for the Q2 EPS and Rev is slow, as the market has already starting making the move, its like there market makers, and news people already have this information ahead of time, because as soon as its out there have already compared qtly results!! seems suspect to me!! what do you think?
Hi again, Craig! I always go to the investor relations website of the specific company that I am tracking. They publish their SEC filings, their earnings presentation, press release, webcast, etc. Companies don't all publish their quarterly numbers on the same day, as that would truly be an information overload. For example, Apple will release earnings on July 30 for the quarter that just finished, while Microsoft released theirs on July 22. In a lot of cases, the first two numbers that an analyst will look for are the revenue number (how much in absolute terms, and is it up or down versus the same period of last year) and the Earnings Per Share number (how much in absolute terms, and is it up or down versus the same period of last year). If revenue and EPS are above expectations, it might trigger some people to buy as soon as the numbers come out. I personally analyze numbers like EPS to a deeper level prior to making any buy/sell decisions: th-cam.com/video/TRY_mjggMQY/w-d-xo.html
The Finance Storyteller thanks so much !! Yes I do know that they come out on different days, what I’m saying is there is a delays on the price action move and the earnings coming out can be a couple of mins, and then instantly the news already has al thai information, it seems that if they published the results in the direct website they wouldn’t have time to absorb that info and pass it to the news and investing.com website so quickly if that is the case, so do you think that the website comes out a lot sooner than investing.com. Ahhhh so the eps is not set by analysis but it’s from the previous Q in the last year!! And same for revenue, that helps a lot
I guess that press releases on earnings are sent out simultaneously through mail, website, etc. Some websites/traders (or their bots) might be quicker to pick up on it than others.
Why there isn't any depreciation in income statement of walmart?
Depreciation is in there, but not split out separately as a line item. I would assume it is lumped in with other expenses in the line "operating, selling, general and administrative expenses". You can find the amount of depreciation and amortization in the cash flow statement (CFOA section, line "add back of depreciation and amortization" th-cam.com/video/YiU_DXlLZ4s/w-d-xo.html Approximately $10B per year at that time (2017).
Good explanation Sir. But there is 1 problem, in profit and loss statement I couldn't find detail information e.g. where to find details information on Net Sales, Walmart International income, etc. Please guide me guide me to find such detail information so that I could properly analyze the P&L statement.
Please download the full annual report of the company, and review sections such as the MD&A (Management Discussion & Analysis) which holds this detailed information: th-cam.com/video/LD6YBBtpEcs/w-d-xo.html
In some of my other videos where I walk through financial statements, I have added pagenumbers of where I found the information: th-cam.com/video/ToE-oggQiqQ/w-d-xo.html
@@TheFinanceStoryteller thank you so much for your guidance I m your new subscriber ...
@@sumaiyashaikh5220 Great! Welcome!
are you french?
Mais non! :-) Dutch.