Background Information about AMD
AMD stands for Advanced Micro Devices, Inc. This company was registered publicly on May 1, 1969 and hence bound by law to file Form 10-K. This company is being involved in selling x86 microprocessors for all categories of the customers, video, multimedia and another different type of related products for desktop and laptops. This company holds a significant market share in the computer industry and also got many awards.
Financial Information Consideration by Any Company for Investors
In this competitive world, it becomes very important for a company to disclose the financial information to their investors in more easily understandable and full detailed way so that they can know fully about the company’s operations. For an investor’s convenience, many financial analysis tools have been used by the management of the company for analyzing the company’s performance.
Following are the most important and widely used financial analysis tools of any company.
- Ratio Analysis
- Vertical Analysis
- Horizontal Analysis
Following are the steps for doing vertical analysis.
- Each income statement line items are divided by the sales revenue to calculate the percentages
- Each asset relating line item is divided by the total assets figure
- Each liabilities and equity related line items are divided by the total liabilities and equity figure.
In horizontal analysis, one year is selected as a base year and then calculates the percentage increase and decrease of each financial statement line item from that base year to the current year.
All the above three analysis methods have to be used jointly to analyze a company’s performance accurately and fully.
Financial Information Usage by AMD’s To Inform Investors
After analyzing the company’s annual report for the year 2010 especially the segment of “Selected Financial Data” (i.e. item-6) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (i.e. item-7), it is very much evident that this company is providing very detailed and in depth financial information about the company so that the existing and potential investors will know fully about each and every segment of the company.
In the item-6 segment, there is a very short and comprehensive summary of the income statement of the company for the past five years (i.e. from 2006-2010) so that the investors can see clearly the profit trends of the company in different years.
Item-7 segment of the annual report is very detailed and includes all the financial procedures, events, facts and figures of the company for the more sufficient and effective dissemination of the company’s information to its investors.
For example, that item-7 segment includes the major accounting estimates which have been used by the company in different transactions and events, the profit or loss incurred in each product line has also been disclosed in detail, detailed notes regarding each material line item, etc.
Financial Analysis Tools Used By AMD for Decision Making
After reading the item-7 segment of the annual report, it shows that the company is using kind of horizontal analysis to analyze the trends of the different line items of the company. Like 2010 financial statements line items are being compared with 2009 year to calculate the percentage increase/decrease and also to calculate the absolute figures. By using this analyzing tool, management can able to find out that which line item needs special consideration to investigate the deterioration of the line item figure from the previous year. For example, graphics net revenue increased by 43% in 2010 year as compared to 2009 year, which is a favorable trend and needs not the great attention of the management.
It has also been pointed out that, ratio analysis tool is also been used by this company for internal decision making purpose.
For example, the gross margin ratio has been calculated for the years 2008-2010.
That is the ratio which is used by this company for the internal decision making process by the following technique.
As shown in the above graph, the gross margin ratio for the year 2008, 2009 and 2010 was 40%, 42% and 46% respectively. That shows that the cost of production expenses is decreasing year by year, which results in the increase of the gross margin ratio with the passage of time. It means that the management of the company is doing a great job in terms of controlling production expenses.
Suppose that if the ratio was exactly the opposite, which shows the trend of decreasing gross margin ratio, so it means that the production cost are have been increasing. That factor which has been pointed out by ratio analysis tools is now being used to select and implement different methods, procedures and comprehensive processes in order to cut down the cost of production expenses of the company.
So this becomes a tool for the performance evaluation of the management which will ultimately help in further corporate level decisions.
AMD 2010 ANNUAL REPORT ON FORM 10-K. (2010, 12). Retrieved from phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODUyNDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODUyNDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
accountingcoach. (2011, 12). What is the difference between vertical analysis and horizontal analysis? Retrieved from accountingcoach.com/blog/vertical-analysis-horizontal-analysis: http://www.accountingcoach.com/blog/vertical-analysis-horizontal-analysis
amd. (2013, 03). Our History. Retrieved from amd.com/us/aboutamd/corporate-information/Pages/timeline.aspx: http://www.amd.com/us/aboutamd/corporate-information/Pages/timeline.aspx
readyratios. (2013, 01). Vertical Analysis of Financial Statements. Retrieved 11 03, 2013, from readyratios.com/reference/analysis/vertical_analysis_of_financial_statements.html: http://www.readyratios.com/reference/analysis/vertical_analysis_of_financial_statements.html