Quantitative Methods Of Forecasting: Naive Approach

If somebody ordered a pepperoni pizza for dinner every Friday night for the last year, what would you predict that person would order the following Friday? Exactly. You'd forecast that the person would order a pepperoni pizza.

This is a simple example for a simple concept. Forecasted demand and sales for the next period will be the same a the actual demand and sales from the current period. This is a cheap and easy method of forecasting. Unfortunately, it is the "naive" approach because things rarely turn out exactly the same as they did the period before. Using the naive approach, anybody looking at sales of PDA's last year would have expected sales to be the same for this year. This turned out to be absolutely untrue as PDA sales dropped by 40% from this time last year (read article).

The Naive Approach is a good entry into quantitative forecasting, but it only scratches the surface. My next entry will show you how to perform moving averages in your forecasts. Thanks for visiting ------Sincerely, Trevor Stasik.

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To return to initial post about forecasting, click HERE.
To view my next post about forecasting, click HERE.

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Quantitative, Forecasting, PDA, Pizza,Financial Analysis

Quantitative Methods Of Forecasting

As mentioned in the introduction to this series, we will be covering quantitative methods of forecasting. In some ways, this is the most important idea in forecasting because businesses rely on quantitative hard data so much. All the data in sales, prices, reports, and financial statements can be used to predict what will happen next. If a company can figure out the market before a competitor does, that firm can act to gain marketshare.


Introduction to Time Series

The idea of time series forecasting is that equally spaced data points taken from past measurements will tend to predict likely data points into the future. No information about the future is considered in these analysis, only past data is used. The four components of a time series are as follows:

TREND - Over the entire set of observed data, do the values go up or down?

SEASONALITY - Over defined period of time such as weeks or seasons, does the pattern of data tend to repeat itself.

CYCLES - Larger, longer repeating term shifts in value due to all possible reasons, including politics.

RANDOM VARIATIONS - Chaos theorist Ian Malcolm from Jurassic Park couldn't spot the patterns in these values. These data points can be considered totally by chance and totally unpredicatable.

Understanding what an analyst or project manager is looking for is useful in interpreting the upcoming quantitative forecasting methods. Thanks for reading.
------Sincerely, Trevor Stasik.

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To return to initial post about forecasting, click HERE.
To view the next blog entry in the forecasting series, click HERE.

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Forecasting, Quantitative, Project Manager, Time Series

Activity-On-Node Scheduling

(NOTE: I am using a lot of pictures in this blog post, so it may take a few minutes to fully load.)

I'm going to have to push the next part of my forecasting series back another day. I will be having a quiz on AON scheduling diagrams later today. I thought that doing a quick blog entry on it would be a better idea. It could be informative for my readers, and good review for my class.

Activity-On-Node (AON) is a form of scheduling that is used on large tasks with many parts. With each part, you want to have an idea how long a task will take. Once you have an idea, you can better schedule your resources. Lets look at the diagram.



The nodes represent activities and the arrows connect each activity. Written in each node will be a group of numbers and an activity designator.
ES=Earliest Start
LS=Latest Start
EF=Earliest Finish
LF=Latest Finish
Duration=Expected time to complete task

Let's fill in our designations and task durations.

Now we know what to call each task and how long they should take. The next step is known as the FORWARD PASS. This step take the earliest step time and adds the duration to come up with the earliest finish time. This earliest finish time becomes the earliest start time for the next node. In the event that there are two events that feed into another one, the longest of the early finish times will act as the new early start time. I hope you followed that, but if not, hopefully this diagram will help:

Once you find the earliest finish times on the last node, we need to do a BACKWARDS PASS. Take the earliest finish time from the last node and use the same number in the latest finish time. Then go back, using subtracting to fill in the bottom parts of the nodes.

A little subtraction of finish times minus start times will then help you find your slack for each node.

Finally, see where slack is zero to find your critical path is. Your critical path represents the tasks that will require the most focus to ensure your project is finished in the most efficient amount of time.

I hope this helps. This is a good tool for project managers. If you have any comments, please let me know.
--Sincerely, Trevor Stasik



Activity on node, scheduling, project manager

Spell Check Is Not Always Your Friend

I'm taking a break from my series on Forecasting today to talk about something else that is very important.

As some of my readers may know, I am currently on a job search. I am looking for an analyst or project management position for after my graduation in May. Well, I have not been getting as many callbacks as I would have expected. I finally figured out why.

To my unfortunate surprise, I had been spelling "Management" as "Managment". Notice the missing "e" in the middle. Spell Check had missed it, and I had missed it during my proofreading. Nearly a hundred resumes over three weeks have gone out with a ridiculous spelling error. I've been telling people that I am the Vice-President of Communications in the Financial "Managment" Association. I don't know how I missed it, but you can bet I fixed it.

Spell Check isn't perfect. I hope that this can act as a reminder to any fellow job seekers out there to check, check, re-check, check again, and check some more for any spelling errors before sending out resumes and cover letters.

Good luck to all.
----Sincerely, Trevor Stasik




Financial Management Association, Analyst, Resume, Spell Check

Qualitative Methods of Forecasting

The method of decision making is not always based on quantitative data. Forecasting in the real world can often be affected by events that are not reflected in the data. Changes in government, weather problems, wars, and other things may require company decisions without data.

Consider the recent examples concerning toy recalls at Mattel due to defects (read about it HERE). Faulty toy designs and lead tainting in the paint have made crucial decisions in production necessary. Mattel had to choose whether to halt production and recall the toys based on current data, possible forthcoming data, but primarily based on a qualitative feeling of market sentiment. The expected harm to future Mattel sales due to this event was probably the driving factor in the recall. There was very little past data to mine to achieve the qualitative forecast that sales would decrease if unsafe toys were allowed to stay on the market.

There are 4 Qualitative Methods of Forecasting:

Jury of Executive Opinion

Delphi

Sales Force Composite

Market Survey

Jury of Executive Opinion
This method of forecasting takes all of the opinions of the highest level executives in the firm that are related to the decision and puts them to a vote. This may be by consensus, by direct vote, or by final executive decision. It depends partially on the culture of the company. These executives may be guided to a decision by supporting data, but often they have no supporting data; only experience and intuition to guide them.

Delphi Method
Originally developed by the RAND Corporation back in the 1960's, many other companies now employ this method of forecasting. The strength of this method is that it employs specific experts in various related fields. These delphi panels consist of experts and a facilitator. Taking a collection of expert opinions, a report is generated that forecasts based on the consensus. The Delphi method is a pretty good method due to a few factors:
1) Confidentiality - since surveys and votes are taken anonymously, there is little likelihood of reprisal for negative forecasts.
2) Less vulnerable to manipulation due to the variety of interests involved.
3) Opinions are based on a broad variety of shared ideas that may lead to innovation in forecasts.Forecastingprinciples.com has a good page with more information about this.

Sales Force Composite
Taking a bottom-up approach to forecasting, the sales representatives for the local regions and districts create predictions of their own geographic areas. These local and regional forecasts are the combined into a national forecast. This could be an advantage to a large company in several geographic areas. Forecasts will be based on the opinions of people that actually make the sales.

Market Survey
Considered one of the least effective forms of forecasting. Predictions of sales are made based on customer surveys. This is not always effective. First, one needs to consider the errors involved in making a customer survey. Sampling errors, non-coverage errors, non-response, and measurement errors can all cloud the accuracy in the survey making process. These results may be made even less because some customers often say that they will do one thing but choose differently when they actually need to spend their money.

So, as you can see, there are needs for qualitative forecasts. The methods used to do the forecasting have varying degrees of accuracy and success. In my next several blog entries, I intend to tackle the subject of quantitative methods in forecasting. Until next time, thanks for visiting.
-------Sincerely, Trevor Stasik.

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To return to initial post about forecasting, click HERE.
To view the next post in the Forecasting series, click HERE.

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Forecasting, Qualitative, Delphi, Sales Force, Market Survey

Forecasting: Time Horizons

When considering your forecasts, be sure to note the frame of time in which it predicts. The advantages, style and method of a forecast for tomorrow will be significantly different from one for a year from now.

Short Range-Less that 3 months
Short Range forecasts are typically the most accurate. This is because the predictions are made from known facts and figures. Managers and corporate officers know what has already been ordered and can draw plans based on these numbers. Very little guess work is needed, just due diligence in making sure scheduled tasks are completed on time. These forecasts are good for planning workforce levels, immediate project scheduling, purchasing plans, and production levels.

Medium Range-3 months to 3 years
Medium Range forecasts are believed to be fairly accurate. Values of recent activities are already known and trends can be calculated based on this. Quantitative methods of forecasting tend to be used very frequently in this time frame. These prognosis tend to focus on sales planning, production planning, and most ordinary budgeting.

Long Range-More than 3 years
These long term forecasts can have low accuracy, therefore requiring constant revisions and updates. The long range time frame is excellent for planning R&D projects or giant construction projects that may adapt to changes over time. One such example would be the Chunnel. The Chunnel is a massive tunnel that burrows beneath the English Channel in Europe. This project began planning in 1986 and completed construction in 1994. With over 13,000 workers and a cost of £10 billion* you can bet that forecasting was a key in the completion of the project. (* £10 billion is equal to approximately 20.3 billion USD on today's date)

Lastly, longer term forecasts include qualitative analysis as well. Intuition and instinct can play a role in developing forecasts. This is the "art" of forecasting. I will dig deeper into qualitative analysis in the next segment of this blog series.

I hope this has been instructive. Please drop me a comment about forecasting. Thanks for reading. -------Sincerely, Trevor Stasik.

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To return to initial post about forecasting, click HERE

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Time Horizon, Forecasting, Project Management, Financial Analysis

Forecasting: The Importance and Use

Forecasting can be more than simply a competitive advantage. It can be the grease that keeps the machinery of business running smoothly.

For companies, operational decisions for today are based on the expectations of tomorrow. Consider how it might be used in the hiring process.

Businesses will also use forecasting to determine whether they have the capacity to fill demand. When a company predicts an increase in demand, they can ramp up production, increase payroll, or purchase new delivery trucks to meet the anticipated demand. Should a company fail to meet its demand, it could lose marketshare and customers. Proper forecasting will also help ensure that excessive amounts of investment in capital are not made where it is not needed. Businesses should be able to calculate the amount of sales expected.

Human Resources may be able to predict turnover in particular departments of a company. Based on those expectations, HR can begin hiring and recruiting in advance. I have some very recent knowledge regarding this because I'm looking for a job after my graduation in May 2008. I have been meeting with recruiters now for jobs that they know will be available, based on forecasting. The HR departments at these firms know that X number of people will leave the firm, therefore they are recruiting X number of new hires to fill those positions.

Management of the Supply-Chain is the most clear use of forecasting. When producing something with multiple parts on a deadline, companies should be able to predict what pieces need ordered and completed by what time and when they need delivered by. Also, based on this, the materials and labor needed to complete each of those parts cost money, and firms should be able to predict what costs will be incurred at each phase of production.

When banks decide whether to offer a new loan to a firm, they may attempt to predict how well an investment will pay off. A firm that cannot manage its costs and inventory may increase risk, making it less likely to pay back its debts. Investors will not want to invest in firms that are less successful at anticipating needs.

As you can see, there are numerous uses for forecasting and it has an important role to play in the operation of a business. In my next segment I will discuss how forecasting is affected by it's time horizon.

Thanks for visiting. ------Sincerely, Trevor Stasik.

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To visit the next post in the forecasting series, click HERE.
To return to initial post about forecasting, click HERE.

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Visit this blog to see the importance of forecasting in determining demand for malaria drugs in Africa. Click HERE.

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Forecasting, Human Resources, Capacity, Supply Chain DemandFinancial Analysis

Sales/Demand Forecasts and Analysis

Click here for the full list of forecasting topics in this series.

When you are a firm producing goods and services, how do you know if you are producing enough to meet demand? More importantly, can you predict what your demand will be in the future? Hopefully this next series of posts will help you discover what the financial winds will bring in your future.
Forecasting is the art and science of predicting the future. Financial analysts, project managers, and operations staff may use them frequently to track projects and investments.

KINDS OF FORECASTS
There are three general kinds of forecasting: Economic, Tech, and Sales/Demand. Economic forecasting is a macro-level forecast about the financial direction of society, usually in terms of nation or state. Tech forecasts consider how rapidly new innovations and developments occurs. Sales forecasts focus on the demand for products and services, how much can be expected to be sold, and the supply of inputs needed to complete projects. This next series of blogs should focus on that last kind of forecasts: Sales/Demand Forecasts.

This is a rough outline of topics I intend to cover over the next series of blogs. As I finish future entries, I will come back to this entry and drop in links to those posts.

TOPICS WITHIN FORECASTING OF SALES & DEMAND

• The Importance and Use.
• Time Horizons of Forecasts
• Qualitative Methods of Forecasting
1. Jury of Executive Opinion
2. Delphi
3. Sales Force Composite
4. Market Survey


• Quantitative Methods of Forecasting
1. Introduction to Time Series
2. Naive Method
3. Moving Averages: Part I / Part II
4. Exponential Smoothing: Part I / Part II
5. Forecasting Error
6. Trend Projection
7. Linear Regression


• Forecast Tracking
• Summary of All Forecasting Topics

I will likely space out the posts regarding forecasting over the next several weeks, with other topics in between days. I hope you will stick with me while I attempt to learn the topic and teach you a bit about it. Hope to see you back here tomorrow.
---------Sincerely, Trevor Stasik.

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Much of the material from this series has been borrowed, modified, and adapted from "Operations Management" by Jay Heizer & Barry Render. Visit their website to learn more HERE. You may also purchase the book HERE.

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Forecasting, Financial Analysis, Project Manager, Forecasts

Good Reading About the Half-Point Rate Cut

ZachStocks has a very good analysis of the Fed rate cut. He states a similar opinion as me but he says it far more eloquently. You should go over there and read it.
Highly recommended post. Read it HERE.



ZackStocks, Rate Cut,

Days Sales Outstanding is an Outstanding Financial Ratio

A handy tool for many financial analysts and investors is the Days Sales Outstanding ratio. It's a good financial tool for deciding how effective a firm is at collecting payments. We can find out how long it takes our favorite companies to collect payments. Grab your favorite companies balance sheet and income statement. The way to calculate it is with the following equation:


Let's take a quick look at a real company and apply it.

Target (Stock Symbol TGT) is a major retailer with millions in sales. Lets see how well they are at collecting those payments for 2006.

Receivables/(Annual Sales /365) =
$6194 million / ($57878 mil / 365) =
39.1 days

Now lets compare that to 2005:
Receivables/(Annual Sales /365) =
$5666 million / ($51271 mil / 365) =
40.3 days

That's not a very significant change. However, if we saw a change in collection period of 10 or more days, investors might feel otherwise. This ratio is also good to use in comparison shopping. You can compare the Days Sales Outstanding ratio with other retailers, for example.

See you tomorrow. Thanks for visiting.
----------Sincerely, Trevor.


Financial Ratio, Days Sales Outstanding, Analyst, Target TGT

The Great Fed Bailout

So it's official. The Federal Reserve is bailing out the people that took out bad loans and the banks that financed them. Yesterday I thought that perhaps the Fed would do the smart thing and hold steady. Sure, that would've caused a temporary disaster, but at least it would have been only temporary. However, rather than let the subprimers take their lumps, the Fed opted for a bailout.

As most of you know by now, the Fed has lowered the Fed Funds rate a half point to 4.75%. (Read the Press Release HERE). The markets went crazy! The Dow surged over 300 points. To me, the more significant teller about the Fed's thinking is that the Fed lowered the Discount Window rate a half a point as well. The new Discount Window Rate is 5.25%. Remember in my earlier entry about how I said that this Rate is for emergency funds in case banks need it. This is just speculation, but is it possible that Ben Bernanke and the entire unanimous Fed Reserve Board, see the credit crisis getting worse before it gets better. Why else would the Fed feel the need to perform such a drastic bailout. The change in both rates is like a fire break trying to contain a forest fire.

I hope it works, however I'm feeling more bearish by the day. The Fed feels that a bailout is more important than containing inflation. What price is oil again?
Over $81 a barrel.

Let me say that again: Over $81 a barrel!

How is inflation not a problem at these prices?

Worry less about the markets and more about inflation.
Let the markets fix themselves.
This bailout is bad policy.

I've gotten myself all worked up, but that's it. I'm done ranting about this for today. I think I'll do an entry for the Financial Tools section of the blog tomorrow. Thanks for reading and drop me a comment please. ------Sincerely, Trevor Stasik



Fed Funds Rate, Discount Window, Bernanke, Subprimers Bailout

Can Rubbermaid Contain Its Excitement?

Fires! Floods! EARTHQUAKES!!!

That's perhaps an exaggeration of what tomorrow could bring, but it's just as frightening. The Fed will make their rate decision which could cause an explosive session in the markets tomorrow. What many are expecting is that the Fed will drop the Fed Funds rate by a quarter point. Other investors are hoping for a half point rate reduction. If this happens, the market will probably respond favorably.

However, what if there is no change in rate? What if the Fed decides that inflation is a greater demon that needs slayed? This has the horrible possibility of causing a minor market crash. The markets will likely fall fast and furious. I don't propose going to cash, but if I were you, I would wait a few days before investing more in the markets.


Looking at today's action, there is one bright spot. Check out how Newell Rubbermaid is pulling up the Housewares industry. Wow! Earnings forcast is up 2 cents per share for next quarter. That's impressive. Plus, I just found out that Newell Rubbermaid is also the maker of Sharpie markers. I use those all of the time! Perhaps CEO Mark Ketchum can share his market moving magic with the rest of the economy.

Thanks for visiting and please leave a comment.-------Sincerely, Trevor Stasik.



Fed, Market Crash, Fed Funds Rate, Rubbermaid

Systematic Analysis: Financial Analysis Decision

It comes down to the moment of truth. The Decision is the final step of our Systematic Financial Analysis. All of the i's have been dotted and t's have been crossed. However, the analysis means nothing without an executive decision. This decision could send a company or investor into the stratosphere or leave them in utter RUIN. (no pressure!)

The decision may be made by an officer above or the analyst may be called upon to make the decision him or herself. Consider other investments that your company has made and how it will fit into a diversified portfolio of projects and assets.
Review the various potential investments, since it is likely that you will have more than one Comprehensive Summary on your desk. Reject the options that have the lower profits and higher risks. Using your best judgement, make the choice that has the greatest profit potential.

Congratulations on your Financial Analysis Decision!



Thank you for reading my first series of blog entries. I haven't done a string of blogs like this previously, and I think I was successful. Drop me a comment. I'd love to know what people thought and how I can improve on future blog entries.

Previous posts in the series:

Systematic and Consistent Financial Analysis Decisions

Systematic Analysis: The Purpose Of The Financial Analysis

Systematic Analysis: The Corporate Overview

Systematic Analysis: Quantitative Analysis

Systematic Analysis: Indepth Accounting

Systematic Analysis: Comprehensive Analysis Summary

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I would like to remind you to visit the website of Gary Giroux, a very knowledgeable author in financial analysis: www.wiley.com/college/giroux.
Much of the material in this series of blog entries contains wisdom borrowed from his book "Financial Analysis: A User Approach"

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Financial Analysis, Decision Making, Portfolio, Analyst

Systematic Analysis: Comprehensive Analysis Summary

The penultimate step in our systematic analysis is our Comprehensive Analysis Summary.

We have looked at the potential investment from several different angles, and now it's time to put it all together in a summary that can be referred to when making the decision. As a formal write up, this comprehensive report should only include the most significant items from each of the areas. Rating each item of the report in order of significance can be useful. Use high numbers for the most significant and low numbers for insignificance. Include only those concerns ranked as most risky from each area in the report. Placing a red or green flag next to the most important item will draw attention to those parts immediately. This is intended as a summary of the analysis.

The report will then be forwarded to the decision maker and be used in the final step: The Financial Analysis Decision.

Previous posts in the series:

Systematic and Consistent Financial Analysis Decisions

Systematic Analysis: The Purpose Of The Financial Analysis

Systematic Analysis: The Corporate Overview

Systematic Analysis: Quantitative Analysis

Systematic Analysis: Indepth Accounting

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I would like to remind you to visit the website of Gary Giroux, a very knowledgeable author in financial analysis: www.wiley.com/college/giroux.
Much of the material in this series of blog entries contains wisdom borrowed from his book "Financial Analysis: A User Approach"

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Comprehensive Analysis, Financial Tool, Finance, Decision Making

Systematic Analysis: In-Depth Accounting Analysis

This is the fifth part of my series looking at the steps of a systematic financial analysis. This is probably the most thought intensive step. What I'm talking about is the In-Depth Accounting Analysis step.

Think of the previous step, Quantitative Analysis, like you were looking at a Lego house. The house is made up of many individually shaped pieces that make up a whole structure. When we were examining the Balance Sheet, Income Statement, and the Statement of Cashflows, we were looking at the big picture. Using various ratios and forecasts, an analyst is able to eliminate bad investment choices.

However, in this In-Depth Accounting Analysis step, we want to take that Lego house apart. We want to see what makes up each of those blocks in the house and make sure that the structure is well built. We want to find out not only what's wrong with potential investments, but what's right with them as well.

To start with, an analyst should dive into the financial statements on a line by line basis. Think about whether the numbers make sense and if something has changed, try to figure out why. Look at the footnotes to find out how the numbers were calculated, how things such as depreciation were reported, and whether any of the reporting procedures in the company have changed.

When you were a kid, did you ever read the instruction booklet that came with the Legos on how to put the house together. If not, it's time to learn. Read the rest of the annual report to discover any hints to progress and growth from the President. Has everything been disclosed in the document that will affect the company? Often times good news will be reported but bad news may be minimized. Has the workforce changed in size? Has the options reporting changed? Etcetera, Etcetera, Etcetera.

Now what are some can we learn from a company that sells grown-up Lego bricks? Quite a bit as well take a look at the 2006 Annual Report for Home Depot, stock symbol HD. In full disclosure, I do not own any Home Depot stock but I do like to shop there occasionally.

Now, the first thing I noticed on the Annual Report's first page (after the table of contents) is that they've opened 247 additional stores over the last two years. That works out to a 13.6% store growth. This could be a concern because of the current housing crisis. Someone wanting to investigate this further would want to look at the individual housing markets that these new store opened in. I'm not going to look at that at the moment. Let's move on to the shareholder letter from CEO Francis Blake. We should look to see if he mentions anything that might increase or decrease the risk of investing in Home Depot. Okay, I see that Mr. Blake is talking about the soft housing market. That's good because it means that they are aware of the problem and are looking to address it. Of course, an analyst should be on the look out in case the company is using a problem in the economy as an excuse. However, since home building materials and a soft housing market are obviously interconnected, let's assume that Home Depot isn't making excuses. We can also see in the letter to shareholders that some acquisitions have been made, including acquisitions in China. Could this be added risk? It's certainly something to consider.

The next several pages have a lot of pretty pictures of people at Home Depot doing things, with a few nice paragraphs about how great the company is. There's nothing wrong with a little bit of self-congratulations. On Page 9, we move into the 10-K. This is where things start to get more interesting. Look at this phrase:

"In February 2007, the Company announced its decision to evaluate strategic alternatives for HD Supply, including a possible sale or initial public offering of the business. There can be no assurance that any transaction will occur or, if one is undertaken, its terms or timing."

An analyst will probably want to check out more recent news events to see if anything has happened with HD Supply since February. Why does the company want to spin off this decision? Has HD Supply been particularly profitable? What would the strategy be? These are some questions I have, and perhaps you have some questions too. Here's another part of the 10-K that raises an eyebrow:

Professional Customers: These customers are professional remodelers, general contractors, repairmen and tradesmen. In many stores, we offer a variety of programs to these customers,
including additional delivery and will-call services, dedicated staff, extensive merchandise selections and expanded credit programs, all of which we believe increase sales to these customers.

EXPANDED CREDIT? I'm not sure that offering expanded credit to any customers is a wonderful idea in the current economic environment. However, this is something that could be explored deeper once we know about the issue. Perhaps Home Depot has a plan that works and perhaps not. An analyst would continue on reading each section of the 10-K. Item 1A covering risk factors is particularly interesting, discussing areas such as the housing market, rising interest rates, and potential supplier issues. There are other things that could add to risk. Item 3 mentions some class action lawsuits that may be a future concern.

Pages 45, 46, and 47 have the Financial Statements. Diligent examination of each line would take time, but this step of the Systematic Analysis is where you would do that. Look at the jump in the Goodwill line in assets. It nearly doubled. It went from to $3,286 million to $6,314 million. That may be a result of the acquisions. However, further analysis may be warranted before any investment takes place. Continuing on are all of the notes. Look through all of those to see if anything stands out as added risk. So on and so forth. It's a big 84 page Annual Report that I don't have time to go through here. However, you get the idea that an analyst will want to do a full examination of the entire Annual Report during this part of the analysis.

An analyst may want even want to re-calculate his or her ratios at this point using any new risks that have been discovered or calculated for. Now with all of this information in hand, it's time for the next step. Put those lego blocks back together, we need to put together a Comprehensive Analysis report. Click HERE to go to the next blog entry.


Previous posts in the series:

Systematic and Consistent Financial Analysis Decisions

Systematic Analysis: The Purpose Of The Financial Analysis

Systematic Analysis: The Corporate Overview

Systematic Analysis: Quantitative Analysis

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I would like to remind you to visit the website of Gary Giroux, a very knowledgeable author in financial analysis: www.wiley.com/college/giroux.
Much of the material in this series of blog entries contains wisdom borrowed from his book "Financial Analysis: A User Approach"

Also, I found that neat picture of the Lego Home Depot over at the Brickshelf, a fan club for builders. Check them out here.

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Systematic Analysis, Annual Report, Home Depot, Lego Accounting Analysis, Financial Tool

Systematic Analysis: Quantitative Analysis

We now come to the fourth part of our look at Systematic and Consistent Financial Analysis Decisions: The Quantitative Analysis. With the help of various ratios, models, and time series, and forecasts, an analyst can begin to get a better look at potential investments. The majority of this information can be obtained through or derived from the balance sheet, income statements, and cashflow statements of the companies.

Why would an analyst want to use Quantitative Analysis? There are four good reasons. 1) Most of the information is standardized already, making comparison of numbers easier. 2) Trends can be observed from the numbers, comparing the company to its past performance as well as peer performance. 3) Assuming that you are investing in the U.S. or in Canada, there is a great amount of transparency that is legally enforced. This helps ensure a level playing field. 4) Benchmarking - ratios can be used to check whether investments meet industry norms. Visit Yahoo Finance or Hoovers to get more information.

Looking at the Quantitative data is a good way to eliminate possible bad investments. This step will not guarantee a good investment, but it may help keep the investor from making a bad mistake. With this knowledge in tow, its time to narrow our search further with Step 4: Detailed Accounting Analysis.

I will likely revisit this topic again at a later date. There is just so much to learn and talk about! Thanks for visiting and drop me a comment.
---------Sincerely, Trevor Stasik.
(Much of the information presented in this post is being borrowed from Gary Giroux's book Financial Analysis)

Previous posts in the series:

Systematic and Consistent Financial Analysis Decisions

Systematic Analysis: The Purpose Of The Financial Analysis

Systematic Analysis: The Corporate Overview

Financial Analysis, Financial Statements, Quantitative Analysis, Ratios

Mr. T and the Price Of Gold

I'm going to add more to the Systematic Analysis series tomorrow. Today I would like to ask you an important question: What do Mr. T and the price of gold have to do with each other? I don't know the answer, but you should check out the chart on Minyanville Money Infotainment website to find out. I just discovered the animated bull and bear having a discussion with Mr. T (CLICK HERE)

This seems to be a very amusing website that combines Financial news and advice, with animation and comedy. The technical analysis does't seem bad either. Here's a recent article about how the markets are moving.

I just discovered Minyanville, but I think I'll look at it more often.



Minyanville, Mr. T, Gold, Precious Metals

Systematic Analysis: The Corporate Overview

A company typically does not exist in a vaccuum. There are typically many different firms competing for marketshare in the same area. This area is known as an Industry. Each of these firms forms business strategies in order to compete in their industry. Using this information, an investor can form a Corporate Overview.

The Corporate Overview is the third part in my series examining Systematic Analysis.
Previous Entries include:

Systematic and Consistent Financial Analysis Decisions

Systematic Analysis: The Purpose Of The Financial Analysis

The Corporate Overview examines the industry a company works in and what business strategies companies are following to gain marketshare.


INDUSTRY
There are a couple of ways to examine what industry a company belongs in. The easiest is perhaps using the internet to it for you. Yahoo Finance and Reuters have whole sections just devoted to looking at the industries. Some of the industries include: Semiconductor- Memory Chips, Personal Computers, Farm Products, Foreign Utilities, Toys & Games, Drugs - Generic, Networking & Communication Devices, and Medical Instruments & Supplies. This is just a small sampling, but it should give you an idea. Companies within an industry are likely to face similar obstacles and will be selling to similar markets.

There are two government provided industry codes that some investors may want to try as well. SIC Standard Industrial Classification Codes and NAICS North American Industry Classification System Codes. Each of these codes file companies under very narrow definitions, which may help in finding an appropriate industry.

As an example, I'm going to use the CIGNA Corporation. Under the SIC Code, CIGNA is considered a Finance company, which provides it with the first number 6. Furthermore, it is an insurance carrier, which makes the second number 3. The number 24 signifies that CIGNA is in the business of providing "Hospital and Medical Service Plans ". Put it together and you have CIGNA's SIC code of 6324. Other companies with the same SIC or NAICS number can be considered industry peers.


BUSINESS STRATEGY
Developing a business strategy is also an important part of the Corporate Overview. Investors seek to find how companies intend to beat the competitors. The three areas that should be looked at in the strategy are as follows:

Cost Leadership - Is the first maintaining efficiency and eliminating waste? A company that is able to do the same thing as a competitor, but at a lower cost, may be considered a better investment.

Product Differentiation - This one relates to brand names and how a similar offering is perceived to be "better" or "different". Consider how some people consider Tide to be a better cleaning product, even though many store brands use similar cleaning chemicals and agents. Tide has differentiated itself as a product in a market. Companies can do the same thing.

Core Competencies - Firms that focus on the thing that they do best, can often find more efficiencies and may turn a greater profit. For example, firms that have the core competency of making pizzas, probably shouldn't be producing the pizza boxes too. The company should stick to what it is best at.

The combination of an industry review and a review of business strategy provide an investor with the Corporate Overview. Next time, I will look at the next step in Systematic Analysis: Quantitative Financial Analysis. Thanks for reading and drop me a comment. --------Sincerely, Trevor Stasik

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I would like to remind you to visit the website of Gary Giroux, a very knowledgeable author in financial analysis: www.wiley.com/college/giroux.
Much of the material in this series of blog entries contains wisdom borrowed from his book "Financial Analysis: A User Approach"

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Financial Analysis, Corporate Overview, Investing, Industries

Trevor Stasik Produces FMA Introductory Video

I haven't had much time to put together a blog entry today. I've been too busy putting together information for Temple University's Financial Management Association today. We are doing a lot of good things there and I'm looking forward to this semester's activities and meetings. I filmed a short introduction video with the organization President, which I then edited. You can watch it here:


Thanks for visiting. Feel free to drop me a comment.
I'm going to go get some sleep now.
-----Sincerely, Trevor Stasik.



Video, FMA, Financial Management, Temple University

Systematic Analysis: The Purpose Of The Financial Analysis

A few days ago, I discussed the six steps to making a systematic financial analysis of an investment. Over the next week or two, I intend to flesh out each of those steps for you. Hopefully, this will make analysis a little easier to understand.

In today's blog, we look at the first step:
Define The Purpose Of The Analysis.

While it may appear to be an easy step, it is perhaps the most important one. Prior to beginning, you should identify what you need to analyze. Decide what your intent and what your goals are for the Analysis.

Important Note: Consider whether you even need to do an analysis at all. Many hours of labor can be saved by eliminating the evaluation of investments you already know that you won't put capital into.

Some answers an analyst may seek could include "Should our firm invest in new equipment" "Should a loan be granted to a retailer" "Will the new growth in sales cause this stock to accumulate new value" "Do we have enough money budgeted to complete this project on time". The list of possible analysis is endless.

Once the big picture goal is figured out, get all of your resources together. I imagine that larger goals may require fact finding missions to get the information from the source. Many other analysis can be performed simply by using the information available on the internet.

With your purpose and information in hand, you are ready to move to step 2: Create An Overview Of The Company or Project.

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Come back over the course of the next week as I continue to blog about how to create a systematic approach to analysis.

---------Sincerely, Trevor Stasik




Purpose, Financial Analysis, Systematic Analysis, Overview

What are American Depository Receipts?

These receipts known as ADRs, represent shares of stock in a foreign company. The shares are actually held at a US based bank, which issues the ADR. The advantages to an ADR are obvious. They make investing in foreign companies much easier because they are traded like normal stocks, money doesn't need to be exchanged into foreign currencies, and they provide exposure into foreign markets. There can be some downsides to the ADRs as well. Foreign companies may not be required to disclose as much information as US companies, therefore they can carry added risk. Investors may not have easy access to information or be able to translate it if they did.

For a better look into ADR's, check out the Bank Of New York site HERE.

That's it for today. Hope everybody is holding on tight, the market is crazy today.
------Sincerely, Trevor Stasik



ADR, American Depository Receipt, foreign exposure,

Credit Ratings: Credit Scores Aren't Just For Consumers

Continuing on with the idea of debt from yesterday's blog about the debt ratio (click here to view), I'd like to talk a little about the Credit Ratings.

Consider this: Most intelligent consumers understand that their credit score determines whether they can purchase a home, get a job, or secure a loan. Those with poor scores are expected to have more difficulty paying back their credit cards, and as such have to pay higher interest payments to compensate the company for the risk. Credit ratings for companies are very similar to an individual's credit score.

Credit ratings are typically given by analysts from credit rating agencies such as Moody's or S&P. These ratings are used by banks to help determine the liklihood that a company might default on its payments. These rating are also used as a guide for fund managers who are not allowed to invest in the bonds of businesses with poor ratings.

Here is a table I borrowed from www.investinginbonds.com to illustrate the different ratings that are available:

Credit Risk	Moody’s*	Standard & Poor’s**	Fitch Ratings**
Investment grade
Highest quality	Aaa	AAA	AAA
High quality (very strong)	Aa	AA	AA
Upper medium grade (strong)	A	A	A
Medium grade	Baa	BBB	BBB
Not investment grade
Lower medium grade (somewhat speculative)	Ba	BB	BB
Low grade (speculative)	B	B	B
Poor quality (may default)	Caa	CCC	CCC
Most speculative	Ca	CC	CC
No interest being paid or bankruptcy petition filed	C	D	C
In default	C	D	D

These ratings in conjunction with the Debt Ratio can give an investor a better handle on how much debt potential investments are carrying. I hope this post has been helpful.
----Sincerely, Trevor Stasik



Credit Scores, Credit Ratings, Analyst, Moodys S and P, Fitch

How to Use The Debt Ratio

The more debt a firm is carrying, the more difficult it may become for it to remain solvent. Basically, when a firm is unable to pay their debts, they will probably need to declare some form of bankruptcy. One way of measuring how strong a company will perform in the future, is by calculating its debt ratio. This is a tool used to help some analysts in determining whether to invest in a company or not.

The calculation is a pretty simple. Grab a balance sheet and find the Total Liabilities and Total Assets. Now divide.


This ratio should tell you whether the firm has the ability to pay its debts, and how many times over.

You can use this ratio to compare a company to its peers in the same industry as well. A company may appear to have a lot of debt in some cases. However, if you compare the company to others in the same industry, you may find that it is the industry norm to carry a little extra debt. However, if the whole industry has a ton of unsupported debt (I'm talking about you sub-primers!) than investors may want to avoid the industry.

If my readers have additional uses for the debt ratio, drop me a comment.
Thanks for reading.
-------Trevor Stasik.



Debt Ratio, Sub-Primer, Financial Tool, Analyst

Systematic and Consistent Financial Analysis Decisions

Financial Analysis Decisions are important choices made by companies about how their money is obtained, spent, and invested. The options that lead to these decisions are researched by financial analysts. The analyst will make observations and calculations, and then recommend the best course of action. Having a systematic approach to making these decisions can be essential to maximizing a firm's profitability. With consistency, an analyst can compare his or her facts and figures with less likelihood of error.

Six steps to follow in an Analysis decision:
1. Define The Purpose Of The Analysis

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Why are you doing an analysis in the first place? Without a clear goal to be achieved, it is difficult to focus your analysis on the right information.

Click HERE to view blog entry about the purpose of performing an Analysis.

2. Create An Overview Of The Company or Project

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Defining the industry a company is part of is the first part of an overview. Once you identify a firm's competitors, an analyst should look at what business strategies the firm is taking to increase market share. If an analyst is looking at projects to invest in, identify all of the options that could be made and the possible results of each option.
Click HERE to view blog entry about the Overview.

3. Quantitative Analysis

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Using ratios, models, and forecasts will give an analyst solid numbers that can be used to compare firms, projects, and costs. An analyst can look at these numbers to eliminate several of the less desirable choices.

Click here to view my blog entry about the Quantitative Analysis.

4. Accounting Analysis

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Further number crunching may be required in a more rigorous examination of the remaining choices. If you are looking at companies to invest in, consider checking the notes in the annual report. Look for similarities and differences between peers in the firm's industry. Check to see if there is anything that could increase risk. In examining projects, check any contracts or possible industry problems that could change a project's profitability in the future.

Click here to see my post about Accounting Analysis.

5. Comprehensive Analysis

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An analyst should summarize the results from the Quantitative and Accounting Analysis. Check the newspaper and online search engine for any last minute changes or headline risks. Create a report comparing the best possibilities that others can base their decisions on. This report can also be used to review decisions later to judge their successes.

Click HERE to view my blog about the Comprehensive Analysis Summary.

6. Financial Analysis Decision

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The decision maker reads the analyst reports, compares the choices, weighs the options, and makes the best decision.
Click HERE to view my blog post about the Decision.

This approach to Financial Analysis decision making is not original. I borrowed most of these ideas directly from "Financial Analysis: A User Approach" by Gary Giroux. You can see some of his other work by visiting this page HERE. I still have much to learn about analysis, and would appreciate any comments that readers would like to leave. Let me know if you have a different approach. Thank you for visiting.

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***UPDATE***
Here are the links to all of the posts in this series.

Systematic and Consistent Financial Analysis Decisions

Systematic Analysis: The Purpose Of The Financial Analysis

Systematic Analysis: The Corporate Overview

Systematic Analysis: Quantitative Analysis

Systematic Analysis: Indepth Accounting

Systematic Analysis: Comprehensive Analysis Summary

Systematic Analysis: The Financial Analysis Decision

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Financial Analysis, Analyst, Analysis Decisions, Decision Making

Trevor Stasik: An Informal Introduction

I'm currently taking a class on Public Speaking. The first speech we have to give is one introducing ourselves in a 2-3 minute period. I found that it is really difficult to edit your whole life down to such a small area. There were many judicious cuts that needed to be made, but my class doesn't have time to learn about everything. Well, some of my blog readers might want to know more about me, so I'm going to copy and paste my planned speech below:

Hi, my name is Trevor Stasik. You know, when I was in first grade, the kids used to make fun of my name. They’d say, “Hey Trevor, how’s the weather?” I don’t understand why they chose the word “weather”. It would have made more sense to chose a word that rhymed better like: never, lever, or sever. Oh well.

I’m a bit older than most of you. I remember a time when Dave Grohl was still a drummer in Nirvana, and the Berlin Wall was still dividing Germany. I graduated from high school in 1996. Our family really didn’t make enough money to send me to college so I needed to pursue other options. I thought that the military might be an interesting option.

I joined the Navy when I was 17 and stayed in for a full 6 year enlistment. I trained and worked as an electrician on two nuclear reactors. My friends used to warn me that I’d come out glowing green, but it turns out that nuclear power is a lot safer than people think. Statistically speaking, the Earth will be destroyed by a stray comet before a Navy reactor can meltdown.

Following my time in the Navy, I decided to go into Film. I had worked on the movie Behind Enemy Lines when it was filmed on my ship. I had also worked on a number of independent short films. I love, love, love movies. So it seemed like a good idea for a college major. Unfortunately, the job market for film majors is filled with positions that are “volunteer only”. You’re lucky if you make a living for the first 10 years in that career path. If I ever wanted to start a family or buy a house, I needed to start thinking economically. I changed my major 2 years ago.

Which brings me to my current passion and career path: I am a senior in the Fox School of Business at Temple University, and a major in finance. I believe that I can make a good living and I can still be creative finding ways to make corporate projects profitable. I’m also working as the Vice-President of Communications for the Financial Management Association (FMA) here at Temple. I lead the team that produces the newsletter and website for the organization.

I look forward to graduation in 2008 and finally finding a job that pays well. Thanks for listening.

And thank you for visiting my blog.
If you want to know more about me, send me an email or drop me a comment.
-------Sincerely, Trevor Stasik.

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This note added later: In case I have old friends trying to google search me, I've added a lot of tags at the bottom of this post. Hopefully it will make it easier for them to locate me.

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Trevor Stasik, Public Speaking, Carl Vinson, Nuclear Power Nirvana Business Finance Introduction Nuke Navy Stasik EM3ElectricianTemple UniversityFMA

Opportunity Costs in Your Personal Life

When you look at a project ahead of you or your firm, what's the first thing you usually do? If you are anything like me, the first thing you do is give it the "once over." A quick overview of the whole just see what you are jumping into.

That sort of evaluation can be effective in your own life as well. Prior to committing yourself to a decision, it is often a good idea to evalute the alternatives; consider the opportunity costs. This applies whether you are moving to a new location or eating a cheese burger. There may be better things that you could be doing with your time, health or money that are better alternatives. What career choices could be better alternatives?

I'm going to keep it short tonight. Whatever you do with your life, look before you leap and consider the alternatives first.

--------Sincerely, Trevor Stasik



Opportunity Costs, Career Alternatives,

EVA Economic Value Added Introduction

EVA doesn't just stand for Extra-Vehicular Activity. It is also a series of letters that stands for Economic Value Added. I just learned about this term a few days ago, so excuse me if I get any of the following information wrong. This is my introduction to you for EVA.

Economic Value Added takes into account not only ordinary accounting costs, but also the opportunity costs of doing business. When a company chooses to make an investment in one place, it is unable to make an investment elsewhere. Therefore, a EVA measures a firm's ability to earn a profit over the required rate of return in the market.

This is the calculation you would want to follow to find EVA:If you think about it, a company could simply close up shop, liquidate the remains, and give that money to shareholders for use in more profitable ventures. The reason they don't is because the firm provides (or is expected to provide) a greater return than the rest of the market. Using EVA to compare companies can be one measure of how well a firm is doing.

For more information about Economic Value Added, check out these links:
"What Is EVA" by Stern Stewart & Co.
"EVA vs ROE" by Loi Tran




Thanks for visiting. See you next time.
----------Sincerely, Trevor Stasik

EVA, Economic Value Added, Rate Of Return, Financial Term