Page 26 - Demo samer flip book

Investopedia.com – the resource for investing and personal finance education.
Therefore, almost all of Office Depot's $1 billion in sales growth can be attributed to an acquisition. Acquisitions are not bad in and of themselves, but they are not organic growth. Here are some key follow-up questions you should ask about an acquisition: How much is the acquired company growing? How will it contribute to the parent company's growth going forward? What was the purchase price? In Office Depot's case, this acquisition should alert us to the fact that the core business (before acquisition) is flat or worse.
The second technical factor is revenue gains due to currency translation. Here is another footnote from Office Depot:
As noted above, sales in local currencies have substantially increased in recent years. For U.S. reporting, these sales are translated into U.S. dollars at average exchange rates experienced during the year. International Division sales were positively impacted by foreign exchange rates in 2003 by $253.2 million and $67.0 million in 2002 (International Division).
Here we see one of the benefits of a weaker U.S. dollar: it boosts the international sales numbers of U.S. companies! In Office Depot's case, international sales were boosted by $253 million because the dollar weakened over the year. Why? A weaker dollar means more dollars are required to buy a foreign currency, but conversely, a foreign currency is translated into more dollars. So, even though a product may maintain its price in foreign currency terms, it will translate into a greater number of dollars as the dollar weakens.
We call this a technical factor because it is a double-edged sword: if the U.S. dollar strengthens, it will hurt international sales. Unless you are a currency expert and mean to bet on the direction of the dollar, you probably want to treat this as a random variable. The follow-up question to the currency factor is this: Does the company hedge its foreign currency? (Office Depot generally does not, so it is exposed to currency risk.)
Summary
Revenue recognition is a hot topic and the subject of much post-mortem analysis in the wake of multiple high-profile restatements. We don't think you can directly guard against fraud; that is the job of a company's auditor and the audit committee of the board of directors. But you can do the following:
• Determine the degree of accounting risk posed by the company's business model. • Compare growth in reported revenues to cash received from customers.
• Parse organic growth from the other sources, and be skeptical of any one-time revenue gains not tied directly to cash (quality of revenues). Scrutinize any material gains due to acquisitions. And finally, omit currency gains.
Working Capital (Balance Sheet: Current)
A recurring theme in this series is the importance of investors shaping their analytical focus according to companies' business models. Especially when time is limited, it's smart to tailor your emphasis so it's in line with the economic drivers
This tutorial can be found at: http://www.investopedia.com/university/financialstatements/ (Page 26 of 66)
Copyright © 2004, Investopedia.com - All rights reserved.