financial statement analysis of a public company

Financial Statement Analysis of the Berkshire Hathaway Inc.
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Financial analysis of the Berkshire Hathaway Inc.
Introduction
Financial statement analysis can be understood best as the assessing how profitable, viable and stable a business is.This is a good indicator of the performance of the business. The evaluation of a businesses’ financial data, together with other pertinent information helps in the assessment of the current and future financial condition of the company. This paper seeks to analyze and evaluate the financial statements of the Berkshire Hathaway Inc., a multinational company based in Omaha, Nebraska, USA. It is among the large conglomerate holding companies in the world and has a huge presence in most of the continents. The company is a significant shareholder in major US airlines such as Delta Airlines and United Airlines. It is also a shareholder in The American Express, The Coca-cola Company, Apple Inc., Wells Fargo, among other companies. Also, the company wholly owns Dairy Queen, BNSF Railway, Lubrizol, Helzberg diamonds among other entities (Berkshire Hathaway Inc., 2018). The financial statements analysis will be used to determine the position of the company based on industry standards.
Financial analysis
The analysis will be based on the horizontal analysis. It is a systematic way of analyzing financial statements such as a balance sheet, income statement and the cash flows whereby two or more periods are used. The data obtained is then used to develop a trend in various components of the financial statement, be it a balance sheet, cash flow statement of the income statement (Gerald, Ashwinpaul & Dov, 2003).

It is an essential tool in conducting the financial statements analysis of a company. Horizontal analysis helps analysts and investors to determine how a company has grown over a period of years. Another key importance of horizontal analysis is that it helps in comparing a company’s growth rate about its competitors and the industry as a whole (Gerald, Ashwinpaul & Dov, 2003). However, the comparability between periods and intercomparison between companies may not be accurate if some data changes.
The Berkshire Hathaway Inc. revenues come from its investment in the insurance sector, manufacturing, servicing and retailing, railway transportation, energy sector, financial services, real estate among other activities. As per the ratio analysis, the sales of the company increased by a combined 6.16% between January 2016 and December 2016. For the year 2015, the sales growth was at 7.76% increase (Berkshire Hathaway Inc., 2018). Sales growth is an indicator of recovery of the economy, meaning more sales. Despite the recent slump in the world economy, the company has maintained a steady increase in sales over the years. Many businesses have seen a massive decline in sales. This is due to an economic crisis not witnessed since the Great Depression before World War II in the 1930’s (Robert, 2000). To achieve sustainable growth in sales, a proper marketing strategy should be put in place. The Berkshire Hathaway Inc. has often reviewed their marketing strategies, and this has contributed much to sustaining the growth of sales.
The total assets of the company increased by 12% between the year 2015 and 2016 (Berkshire Hathaway Inc., 2018). This could be attributed partly to the acquisition of BNSF railway in 2014 (Bloomberg, 2014).Since the business has not split its class A shares, it continues to attract long-term investors rather than short-term speculators, enabling mega investments. The reason behind this may be due to long-term investors are more likely to inject significant capital into the business rather than short-term speculators. However, the management strategy also greatly affects the ability of a company to increase its assets over the years. The Berkshire Hathaway Inc. has recently been involved in the real estate sector, and such investments have significantly increased its assets. Business opportunities are always there, but the management strategy can transform an initial investment to a large conglomerate (Peter et al., 2009).
The property, land and equipment accounts in the balance sheet account for a commanding 57.3% of the total assets, asserting that the company is investing more the real estate. (Berkshire Hathaway Inc., 2018). It has invested much also US airlines and BNSF railway. Also, the company is involved in different lines of manufacturing, and hence a substantial part of its assets includes equipment, land, properties such as buildings among other fixed assets.
Another aspect of the operations of the company is its liquidity. The cash ratio reduced from 2.16 in the year 2015 to 1.82 in the year 2016.The cash ratio is a major indicator of a company’s ability to settle short-term debts using cash and cash equivalents only. The current ratio is another liquidity ratio as shown in the ratios analysis. For the fiscal year 2016, the current ratio was 3.01 (Berkshire Hathaway Inc., 2018). The quick ratio is used as a measure of how a company can settle its short-term liabilities. This is achieved using cash or quick assets, which are easily converted to cash (Lawrence, 1997). The quick ratio for the fiscal year 2016 was 2.67, which was a decline from the quick ratio of 3.24 in the previous year. This show that the short-term financial security of the company reduced in 2016 compared with the year 2015 (Berkshire Hathaway Inc., 2018).The easiest indicator that a business is on its decline is low liquidity ratio which means it is unable to meet short-term financial objectives sustainably(Lawrence,1997).Therefore, it is an essentially important aspect in the running of companies that the company can meet its short-term liabilities. Otherwise, this could indicate an impending problem in the form of bankruptcy and inability of the company to meet its financial obligations.
The company’s shareholder’s equity went up by $27.25 billion in the fiscal year 2016 compared to 2016. Retained earnings by shareholders are the possible reason for this observation. Due to an increased high income compared to stakeholder’s equity causing an increase on the return on equity in 2016.It is also noted that the company bought back shares and hence its treasury stock increased. The class A shares of the company are one of the most priced shares in the business world. This again asserts the strategy of Berkshire Hathaway Inc. targeting long-term investments as opposed to short-term speculators interests (Berkshire Hathaway Inc., 2018).
The gross profit margin of the company was relatively constant over the fiscal years 2016 and 2015.The gross profit margin was 31% for 2016 and 33% for the fiscal year 2015 (Berkshire Hathaway Inc., 2018). These margins were within the accepted range of between 25% and 35%, meaning they were well above the lower threshold of 25% (Berkshire Hathaway Inc., 2018). By extension, the gross profit margin will affect the net profit margin if the operating expenses are held constant. However, if operating expenses increase, then there is need to increase the gross profit margin (Gerald et al., 2003).This ensures that the company is still able to operate profitably despite a hike in its operating expenses. Profit margins are initial indicators that the company is working on a financially healthy method.
Company position
The Berkshire Hathaway Inc., just like any business entity faces competition from other entities. However, some of the businesses it owns or controls have little or no competition. For example, the Burlington Northern. Also, major investment in the BNSF railway project has seen the company’s liquidity decreased, meaning it is banging more on capital investment for the foreseeable future. This potential weakness in the company could hand its competitors a rare chance to capitalize on it in their strategies. The company has also invested heavily in the airline’s sector with majority shares in Delta Airlines and United Airlines. However, other major airlines in the United States have a significant stake in the aviation industry and hence the company must up its stakes to command more in the aviation industry. Going by the size of the company and its financial might, Berkshire Hathaway Inc. is a giant conglomerate, and it is a leader in many sectors, and it has established itself as one of the most promising companies in the world, under the leadership of Warren Buffett (Bloomberg, 2014).
Conclusion
The company, as shown in the financial statements analysis remains a leader infamy aspects of the business world. It has continually continued to outsmart its competitors. However, more opportunities to capitalize on existing and the conglomerate should make its presence to more parts of the world, especially in Africa where there remains a lot of untapped potentials. Also, investing more in the real estate could help it reaching greater heights in the long term.

References
Gerald, J.W., Ashwinpaul, C.S., &Dov, F. (2003).The Analysis and Use Of Financial Statements. New Jersey, USA: Wiley.
Berkshire Hathaway Inc. (2018). BRK.A (U.S.: NYSE). Retrieved from: http://quotes.wsj.com/BRKA/financials/annual/income/statement
Berkshire Hathaway Inc. (2018). BRK.A (U.S.: NYSE).Retrieved from:
http://quotes.wsj.com/BRKA/financials/annual/balance/sheet
Bloomberg L. P (2014 November, 10). Buffett’s $15 Billion from
BNSF Show Railroad Came Cheap. Retrieved From: https://www.bloomberg.com/news/articles/2014-11-10/buffetts-15-Billion-from-bnsf-show-railroad-came-cheap
Lawrence, A.B. (1997).The essays of Warren Buffet: The Samuel And Ronnies Heyman Centre on Corporate Governance.
Peter, l., &John. (2000).Open Up on Wall Street. New York, USA: Penguin Books
Robert, S.J. (2000).Irrational Exuberance. Princeton, USA: Princeton University Press.