Financial analysis concepts and applications

Financial Analysis

Electronic communication has increased the availability and speed at which financial information is made public. Announcements and stock prices are made available in real time. Aggregated and historical information is widely available on information aggregator sites like Yahoo Finance. Annual reports are publicly available, and securities regulators insist that they be made publicly available.

The increased availability of financial information about companies serves to improve both the transparency and liquidity of financial markets. Investors of all types and abilities now have access to the information that they need to make information decisions. That all companies must produce consistent financial statements according to GAAP also helps with the transparency of financial information. With easy access to this information, investors can become more educated and more confident. Ultimately, this improves investor confidence in the system and liquidity in the market, improving the market's function.

Because publishing this material improves the function of capital markets, there is no financial material that should be omitted from the Internet. All investors should have access to the same information. I do, however, feel that privately-held companies should be under no obligation to publicly publish their financial records. This should only be for publicly held companies, because of the value that those statements have to the investing community. It should be up to that community to determine which pieces of information are relevant, so all information should be made available.

B. 1. The title of the report is the Reitmans Annual Report 2005. The report has a total of 30 pages, including the covers and title pages.

2. According to the annual report, Reitmans operates 867 stores in Canada. The company operates stores under a wide range of brand names, including the eponymous Reitmans stores, Smart Set, MXM, Addition Elle, RW & Co., Thyme and Penningtons.

3. The President of the company is Jeremy Reitman. The Vice-President is Eric Williams.

4. b, thousands of dollars

5. Sales in 2005 were $912,473,000. Earnings in 2005 were $66,907,000. Earnings per share were $1.94 basic and $1.90 diluted.

The base year is 2004, so the sales increased as follows:

912,473 / 851,634 = 7.14%

The net income increased as follows:

66907 / 40035 = 67.1%

6. Pages 1-5 show how the company is achieving its objective of growing. A number statistics are used, for example the number of stores, the increases in earnings, revenue, shareholder's equity, return on equity and dividends. There has also been growth in EBITDA, EPS, cash and investments and pre-tax earnings as well. All of this growth is highlighted in this section.

7. The "management discussion and analysis" section of the annual report covers a number of achievements for the company in the past year. One of these achievements is that the company increased sales by 7.1%. The second is that the company "significantly improved gross margins." The third is that after-tax net earnings increased 67%.

8. The auditor of the financial statements was KPMG and the 2005 statements have been audited.

9. The company has both Class A non-voting shares and common shares. There are 28,054,128 of the Class A and 6,720,000 of the common outstanding. There were $7,573,000 in dividends paid out in 2004. The current market price of Reitmans is $16.95 according to Yahoo Finance Canada. The five-year chart from the same website is contained in Appendix A.

C. 1) The first report will be the 2005 Reitmans report. The second report will be the 2010 Annual Report for Alimentation Couche-Tard (English version).

The Reitmans "Highlights" section contains a brief corporate profile, although this should be considered incomplete as it is quite brief and lacking in detail. There is a discussion of results, which serves as a letter to shareholders. There is a report on financial performance included, providing some brief highlights. The financial section is a mandatory component of annual reports and is therefore included. Notes to financial statements are also included in the Reitmans report, as again they are mandatory. The Couch-Tard report includes a message to shareholders, several pages of management discussion & analysis, notes to financial statements, a fiscal 2010 overview that serves as a discussion of the financial condition of the company and there is also a discussion of the business that serves as a company profile.

Both annual reports contain fairly upbeat dialogue, as both companies were coming off of growth years. Reitmans optimistically highlighted its growth success. Couch-Tard begins with the tone-setting line "Wherever I look this year, the view is better" and uses headers such as "Grass is greener," "keeping things fresh" and "a new chapter" to convey optimism. In general, the sections at Reitmans are brief and lacking description, though they are accompanied by graphs and images. Couche-Tard's discussion is more comprehensive in nature, but lacks colour -- it is very professional in presentation. Both companies have a decent amount of depth in their notes to the financial statements, however.

Both reports provide comparative financial statements. The ones used by Reitmans are easier to understand simply for the way they are presented. Both contain the same information, but the larger size and superior simplicity of the Reitmans ones makes them clearer to the reader. Couche-Tard, however, provides a far greater degree of depth in its financial statements, which makes them more informative for the experienced reader of financial statements.

As discussed, Reitmans uses more visual aids in its report. Neither company makes extensive use of charts or graphs it should be noted, but Reitmans definitely has the better visual presentation of the two. Couche-Tard utilizes a dense, information-rich format that unfortunately lacks any ability to convey information visually. This is noticeable even in the way that the numbers are juxtaposed with one another -- there are too many lines and they are too close together.

The untrained reader will definitely have an easier time with the Reitmans report. The report is simple and to the point. It tells the story of the company's past year, and the way in which it does so does not assume prior knowledge on the part of the reader. As rich as the Couche-Tard report is with respect to information, it is unfortunately difficult to penetrate. For a reader with little knowledge of accounting or experience with annual reports, it would be difficult to truly understand the performance of Couche-Tard in 2010. The management statements are in-depth with respect to the events of the business, but again without prior knowledge of these situations (e.g. The lack of purchase of Casey's General Stores) would probably gain significantly less insight. Existing shareholders probably get more value out of the Couche-Tard report than prospective shareholders; the reverse is probably true of the Reitmans annual report.

In general, the annual reports of Reitmans and Couche-Tard present two very different approaches to the idea of an annual report. While they both present roughly the same information -- certainly with respect to the financial statements -- they do so in very different ways. Reitmans is short on detail, providing little more than what is allowed by law and shockingly little with respect to discussion of the business. The way it presents its data, however, does make for easy interpretation.