COMPREHENSIVE CASE APPLYING FINANCIAL STATEMENT ANALYSIS

A comprehensive case analysis of the financial statements and notes of Campbell Soup Company is our focus. This
book has prepared us to tackle all facets of financial state- ment analysis. This comprehensive case analysis provides us the
opportunity to illustrate and apply these analysis tools and techniques. This case also gives us the opportunity to show how we
draw conclusions and inferences from detailed analysis. We review the basic steps of analysis, the building blocks, and key
attributes of an expert analysis report. Throughout the case we emphasize applications and inferences associated with financial
statement analysis.

STEPS IN ANALYZING FINANCIAL STATEMENTS

Financial statement analysis is oriented toward achieving specific objectives.

The first step is to explicitly define the analysis objectives. Our evaluation of the issues and concerns leading up to
specification of objectives is an important part of analysis. This evaluation helps us develop an understanding of pertinent and
relevant objectives. It also helps eliminate extraneous objectives and avoid unnecessary analysis. Identifying objectives is
important to an effective and efficient analysis. Effectiveness in analysis implies a focus on the important and relevant elements
of financial statements. Efficiency in analysis implies economy of time and effort
The second step in analysis is to formulate specific questions and criteria consistent with the analysis objectives.
Answers to these questions should be both relevant to achieving the analysis objectives and reliable for making business
decisions. Criteria for answers must be consistent with our risk and return requirements
The third step in analysis is identifying the most effective and efficient tools of analysis. These tools must be relevant
in answering the questions posed and the criteria established, and must be appropriate for the business decision at hand.
The fourth step in analysis is interpreting the evidence. Interpretation of financial data and measures is the basis of
our decision and subsequent action. This is a crucial and diffi- cult step in analysis, and it requires us to apply our skills and
knowledge of business and nonbusiness factors. It is a step demanding study and evaluation. It requires us to pic- ture the
business reality and environment behind the numbers. There is no mechanical substitute for this step. Yet the quality of our
interpretation depends on properly identi- fying the objectives of analysis, defining the questions and their decision criteria, and
selecting efficient and effective analysis tools

BUILDING BLOCKS OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis focuses on one or more elements of a company’s financial condition or operating
results. Our analysis emphasizes six areas of inquiry—with vary- ing degrees of importance.
1.Short-term liquidity. Ability to meet short-term obligations.
2. Capital structure and solvency. Ability to generate future revenues and meet
long-term obligations.
3. Return on invested capital. Ability to provide financial rewards sufficient to
attract and retain financing.
4. Asset turnover. Asset intensity in generating revenues to reach a sufficient
profitability level.
5. Operating performance and profitability. Success at maximizing revenues
and minimizing expenses from operating activities over the long run.
6. Forecasting and valuation. Projection of operating performance, ability to
generate sufficient cash flows to fund investment needs, and valuation.
Applying the building blocks to financial statement analysis involves determining:
Objectives of the analysis.
Relative emphasis among the building blocks.
REPORTING ON FINANCIAL STATEMENT ANALYSIS

The foundation of a reliable analysis is an understanding of its objectives. This under- standing leads to efficiency of
effort, effectiveness in application, and relevance in focus. Most analyses face constraints on availability of information.
Decisions must be made using incomplete or inadequate information. One goal of financial statement analysis is reducing
uncertainty through a rigorous and sound evaluation. A financial statement analysis report helps on each of these points by
addressing all the building blocks of analysis. It helps identify weaknesses in inference by requiring explanation, and it forces us
to organize our reasoning and to verify the flow and logic of analysis. The report also serves as a communication device with
readers. The writing process reinforces judgments and vice versa, and it helps refine inferences from evidence bearing on key
building blocks.

A good report separates interpretations and conclusions of analysis from the infor- mation underlying them. A good
analysis report typically contains at least six sections devoted to:
1. Executive summary. Brief summary focused on important analysis results; it launches the analysis report.
2. Analysis overview. Background material on the company, its industry, and its economic environment.
3. Evidential matter. Financial statements and information used in the analysis. This includes ratios, trends, statistics,
and all analytical measures assembled.
4. Assumptions. Identification of important assumptions regarding a company’s
industry and business environment, and other important assumptions for esti-
mates and forecasts, including its business strategy.
5. Crucial factors. Listing of important favorable and unfavorable factors, both
quantitative and qualitative, for company performance—usually listed by areas of
analysis.
6. Inferences. Includes forecasts, estimates, interpretations, and conclusions
drawing on all prior sections of the report.

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COMPREHENSIVE CASE APPLYING FINANCIAL STATEMENT ANALYSIS

COMPREHENSIVE CASE: CAMPBELL SOUP COMPANY

Sales Analysis by Source

Campbell Soup brands include ready-to-serve soups: Home Cooking, Chunky, and Healthy Request. An integral part
of its soup business is Swanson’s canned chicken broth. Americans purchase more than 2.5 bil- lion cans of Campbell’s soups
each year and on average have nine cans in their pantry at any time during the year.
Fiscal Year 11 is a successful transition year for Campbell. It completed major divestitures and accomplished
significant restructuring and reorgani- zation projects. Corporate goals concerning earnings, returns, and cash flows are being
met. The North American and International divisions produced strong earnings results. The company enters Year 12 with a re-
configured product portfolio, positioned to support continued solid finan- cial performance. This performance gives Campbell an

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COMPREHENSIVE CASE APPLYING FINANCIAL STATEMENT ANALYSIS

opportunity to in- crease consumer advertising and to further the introduction of new product lines and continue support for
flagship products.

Comparative Financial Statements

Comparative financial statements for Campbell for Years 6 through 11 are presented in Exhibits CC.2, CC.3, and
CC.4 (financial statements and related information for Campbell Soup are in Appendix A). The auditor’s opinions on its financial
statements for the past six years are unqualified.

Further Analysis of Financial Statements

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COMPREHENSIVE CASE APPLYING FINANCIAL STATEMENT ANALYSIS

Growth rates for important financial measures, annually compounded, are reported in Exhibit CC.5. These rates are
computed using four different periods and are based on per-share data (see Exhibit CC.9). Most impressive is the growth in net
income per share over the past five years (12.93%). Growth in sales per share over the same recent five-year period is at a
rate less than that of net income. Equity per share growth in the recent 5-year period declined compared to the 10-year period.
This finding, including the two negative growth rates in the exhibit, is due to divestitures and restructurings in Years 9 and 10.
We also compute common-size income statements and balance sheets in Exhibits CC.6 and CC.7. Exhibit CC.8 presents the
trend indexes of selected accounts for Campbell Soup. Exhibit CC.9 shows Campbell Soup’s per-share results.
Analysis of Exhibit CC.4 reveals operating cash flows are a steady and growing source of cash, with a substantial in-
crease in Year 11 net operating cash flows ($805 million). The slight cash downturn in Year 9 is due primarily to an in- crease in
inventories ($113 million) and a decrease (negative) in deferred taxes ($68 million). The increase in inventories is tied to
management’s desire to improve customer service, and the decrease in deferred taxes relates to restructuring and unusual
charges that are not tax deductible, resulting in $78 million of credits to tax expense but higher current tax liabilities. We also
see that the declines in net income for Years 9 and 10 are not reflected in operating cash flows. This is because these declines
are from restructuring and divestiture charges having no immediate cash flow effects.
Campbell’s common-size statements of cash flows for the six years ending with Year 11 are shown in Exhibit CC.10.
This exhibit reveals several patterns in the company’s cash flows over these six years. Transitory fluctuations in cash, such as
those due to the high usage of cash for investing activities in Year 7 (62%), are put in perspective by including aggregate
figures in a total column. Total operating cash flows constitute more than one-half of all cash inflows. This finding along with
evidence that financing activities (using 7% of cash in- flows) are mostly refinancing is indicative of Campbell’s financial
strength and financing practices. The total column reveals that cash used for acquiring assets and businesses consumes nearly
50% of cash inflows, and about 12% of cash inflows are used for dividends.

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