Chapter 3:introducing financial statements

Question 3-1)

What is wrong with just doing what “works’’ in relation to analysing financial statements? There are plenty of experienced practitioners in our capital markets. Why do we not simply find out what most are doing and do this ourselves? What do you think and why?

By doing what “works” and just comparing the numbers in a firm’s financial statements with no real plan or structure as to how to go about it does not give a very accurate indication of the company’s position.  This system (if you could even call it a system) came about in the 1930s and it seems not much has been done since then to improve it. Yet, much has changed in the world of business and finance since then. Also, comparing one company to another is like comparing apples and oranges… not a very accurate way to judge a firm’s financial position!

Question 3-2)

What is the benefit of having a structure, such as the du Pont Company’s framework, to help use ratios to analyse a firms financial statements? Is it any better (or worse) than simply doing what experienced practitioners do? Why or why not?

To analyse financial statements with a clear cut method or structure, such as the du Pont framework, that has also had numerous studies performed to test its efficiency is in my opinion the best way to go. The benefits are that all companies that are analysed will be done so in the same way. Also, in addition to using a structured approach I think we also need to look at things outside of the firm to get the whole picture. Analysing a firms financial statements without connecting them to its economic and business reality is kind of like buying a car without doing your research; making a decision with only half of the information that is available to you.

KCQs

In section 3.4 it talks about money being worth more now than what it will be in the future… but wouldn’t it be better to leave shares with a company longer so the value of them can go up?

My answers from chapter 1: A way of viewing business.

Question 1-1)

Why do we have double-entry accounting? Why do we enter everything in twice? Why not just the once?

Double-entry accounting is a system of recording transactions (from journals to ledgers). It ensures that the relationship between the different elements of a business model remain intact.

Question 1-2)

Identify 3 Assets, 3 Liabilities and 3 items of Equity:

Assets:

1. Property, Plant and Equipment.
   Land, land used for vineyards and land used for production of vineyards. Building and investment properties. Net worth for this asset in 2013 was €9,602m.
2. Brands and other intangible assets.
   This area consists of brands, trade names, license rights leaseholder rights, software and websites. Net worth for this asset in 2013 was €11,458m.
3. Investments in associates.
   LVMH has a 40% stake in Mongoual, SA, a real estate firm; a 45% stake in PT. Sona Topas Tourism Company TBK (STTI), an Indonesian retail company and a 46% stake in JW Anderson, a London based ready to wear brand.

Liabilities:

1. Deferred income.
   Deferred income is money paid for goods before receiving them.
2. Employee profit sharing.
   Employee profit sharing is a scheme that entitles employees to a percentage of company profit.
3. Advances and payments on accounts from customers.
   This one speaks for its self, money received from customers before goods or services are received.

Equity:

1. Long term borrowing.
   Borrowings for things such as bonds and interest rate risk derivatives and other derivatives. (Tools to manage financial risk with interest rates, currency exchange etc.)
2. Provisions.
   Provisions such as medical costs and pensions.
3. Deferred tax.
   Deferred tax can be used to reduce the subsequent period’s tax bills.
   KCQs
   The idea that a company is a separate legal entity to its owners. Is this just with finances? What about if the company is caught doing something fraudulent? The owners are surely the ones in trouble then? Maybe I am thinking in to it all a bit too much?
   
   
   

Some more KCQs I've come up with while working on my spread sheet and I am very confused :-(

In the consolidated income statement it says revenue for

2010; €20,320

2011; €23,659

2012; €28,103

2013; €29,149

That’s an increase for all years while the revenue on the income statement says:

2010; €2172

2011; €2783

2012; €1951

2013; €2173

That’s a drop between 2011 and 2012… does anyone know why this is and why the two statements are different?

So, I've been pondering the big question! Accounting is about understanding the realities of business; what is really going on in a firm. Or is it??? I may change my mind several times over the duration of this subject but my view at the moment is that a financial statement is only as reliable as the person that wrote it. A financial document is an extremely small snapshot of what is really going on in a company; the personal assessment of the person that wrote it. To truly understand a business you have to look at its economic and business realities. What is going in in the real world that will directly impact this company's ability to make money? Using this hand in hand with the financial records of a firm will give a much better picture of the financial reality for that firm. What are your thoughts on this?

I've included a link to the main page of LVMH and also the financial statements for 2011; 2012 and 2013.


LVMH main page: http://www.lvmh.com/


Financial documents 2013: http://www.lvmh.com/uploads/assets/Com-fi/Documents/en/Reports/LVMH_2013_financial_documents_VA.pdf


Financial documents 2012: http://www.lvmh.com/uploads/assets/Com-fi/Documents/en/Reports/Documents_financiers_2012_VA.pdf


Financial documents2011: http://www.lvmh.com/uploads/assets/Com-fi/Documents/en/Reports/Reports_2011/Documentsfinanciers31122011VA.pdf

I have been doing some research on Bernard Arnoult, the CEO of LVMH. Bernard graduated in 1971 with a degree in engineering from Ecole Polytechnique. Interestingly, he has no accounting background as most CEOs do! As a young man, newly graduated from university he took over the families construction firm. He worked for several years in this firm before purchasing a textile company called "Boussal Saint-Freres" who also happened to own Christian Dior! Finally in 1987 Bernard invested in LVMH and later became CEO of this large luxury goods conglomerate.

Looking at the income statement, you can see that for 2010 and 2011 revenue was increasing. More than likely due to poor market performance revenue dropped down to a low in 2012 and has increased again in 2013. I've created a small table to demonstrate:

Income from investments and other revenue (Euro millions)
December 31st 2013	2173
December 31st2012	1951
December 31st2011	2783
December 31st2010	2172



LVMH has recently started working on a new project called HELIOS; which is a  research facility for its beauty division. HELIOS employs 300 research scientists and uses the latest cutting edge technology in the perfume and beauty industry to create products with the highest stands of quality. Situated in Saint-Jean-de-Braye, it is the largest production site in beauty that France has ever seen.
I've added two links, the first to a news article and the second to a video to give an understanding about what HELIOS is all about.

News article:
http://fashion.telegraph.co.uk/beauty/news-features/TMG10459642/Helios-LVMHs-giant-new-super-beauty-lab.html




Video:

https://www.youtube.com/watch?v=UGIsOP79260

An interesting read about LVMH achieving a large profit last year. The article talks about the 'value enhancing strategy' that I have mentioned previously. Following concerns that LVMH was suffering a slow down in previous years with the demand in China waning. It is believed that the outlook for the group is improving dramatically. Follow the link to read the news article.

http://www.independent.co.uk/news/business/news/not-out-of-fashion-lvmh-hits-6bn-annual-profit-mark-for-first-time-ever-9097306.html


Also, I found a great blog that reiterates the effectives of the "value enhancing strategy" and also talks about the acceleration of growth of LVMH. Follow the link:

http://www.bloomberg.com/news/2014-01-30/lvmh-full-year-profit-gains-amid-rebounding-fashion-sales-growth.html