Harvard Business School

9-197-010
Rev. May 30, 1997

First Investments, Inc.: Analysis of Financial Statements
In March 1995, Fred Aldrich, a summer trainee with the First Investments, Inc., was called into the office of the head of investment analysis section of the trust department. The following conversation took place: Fred, here are the 1994, 1993, and 1985 Basic Industries Company’s financials (Exhibit 1) and a 10-year summary (Exhibit 2 ). Our trust department has owned this stock since the early 1980s. As you know, our portfolio people place a lot of emphasis on the quality of a company’s earnings and the return on owners’ equity in making stock selections. Well, they are worried. The 1994 Basic Industries annual report shows a …show more content…

are Dividends declared per common share Earnings as a percentage of sales Earned on average shareowners’ equity Cash dividends declared Shares outstanding—average (in thousands) Shareowner accounts—average Market price range per share Price-earnings ratio range Current assets Current liabilities Total assets Shareowners’ equity Plant and equipment additions Depreciation Employees—average worldwide —average United States $13,413.1 10,137.6 2,280.5 $12,418.1 $ 995.0 185.8 (180.1) $ 1,000.7 (382.4) (10.2) $ 608.1 $ $ 3.34 1.60 4.5% 17.2%

1993

1992

1991

1990

1989

1988

1987

1986

1985

$11,575.3 8,55.2 2,105.3 $10,620.5 $ 954.8 183.7 (126.9) $ 1,011.6 (418.7) (7.8) $ 585.1 $ $ 3.21 1.50 5.1% 18.1%

$10,239.5 7,509.6 1,915.2 $9,424.8 $ 814.7 189.2 (106.7) $ 897.2 (364.1) (3.1) $ 530.0 $ $ 2.91 1.40 5.2% 18.0%

$9,425.3 6,962.1 1,726.2 $8,688.3 $ 737.0 152.0 (96.9) $ 792.1 (317.1) (3.2) $ 471.8 $ $ 2.60 .38 5.0% 17.6%

$8,726.7 6,423.6 1,754.2 $8,177.8 $ 548.9 106.8 (101.4) $ 554.3 (220.6) (5.2) $ 328.5 $ $ 1.81 1.30 3.8% 13.2%

$8,448.0 6,346.1 1.615.3 $7,961.4 $ 486.6 98.7 (78.1) $ 507.2 (231.5) 2.3 $ 278.0 $ $ $1.54 1.30 3.3% 11.5%

$8,381.6 6,251.1 1,482.1 $7,733.8 $ 647.8 86.3 (70.5) $ 663.6 (312.3) 5.8 $ 357.1 $ $ 1.98 1.30 4.3% 15.4%

$7,741.2 5,779.4 1,320.9 $7,100.3 $ 640.9 91.4 (62.9) $ 669.4 (320.5) 12.5 $ 361.4 $ $ 2.00 1.30 4.7% 16.5%

$7,177.3 5,311.0 1,234.3 $6,545.3 $ 632.0 72.4 (39.9) $ 664.5 (347.4) 21.8 $ 338.9 $ $ 1.88 1.30 4.7% 16.2%

$6,213.6 4,449.2