RECENT POSTS
Wednesday, October 9, 2019
U.S. firms with Sales in China through 2018.

Wednesday, October 9, 2019
Tracking  Pension Data in Calcbench

Friday, October 4, 2019
In Depth: Leasing Costs in Retail Sector

Thursday, September 19, 2019
Alibaba and Cloud Computing

Monday, September 16, 2019
Introducing Critical Audit Matters

Wednesday, September 11, 2019
Our Fireside Chat on Goodwill Assets

Friday, September 6, 2019
Pulling Forward Share Buybacks

Saturday, August 31, 2019
A Quick Catch-Up on VMWare

Friday, August 23, 2019
By the Numbers: Restructuring Costs Over Time

Wednesday, August 21, 2019
WeWork Liabilities, Part II

Tuesday, August 20, 2019
WeWork’s Liabilities in Perspective

Wednesday, August 14, 2019
Comparing LinkedIn, Twitter Revenue

Wednesday, August 7, 2019
Leasing’s Effect on Retail Balance Sheets

Thursday, August 1, 2019
Using Calcbench to Find China Exposure

Tuesday, July 30, 2019
Leasing Details: The Comcast Example

Monday, July 29, 2019
Easy Fundamental Equity Analysis in Python

Monday, July 22, 2019
Calcbench Data and Tax Reform Insight

Wednesday, July 17, 2019
Downshifting in the Trucking World

Tuesday, July 16, 2019
New Report: Adoption of New Lease Accounting Standard

Friday, July 5, 2019
More Consequences of Lease Accounting

Archive  |  Search:

Periodically, we publish U.S. firms with sales to China and it was past time for an update.

We will also publish in the very near future, a set of data for the firms with material Property, Plant and Equipment in China.

For now, please see the annual sales of U.S. firms to China for the period 2014-2018 on an annual basis. There is no surprise that Apple is the highest with over 50 billion in sales in 2018. Boeing, Intel, Qualcomm and Micron round out the top 5.

Note that 2018 is the first year that Wal-Mart reported sales in China.

Clients who would like to get this data for themselves should reference our ‘How-to’ blog post from earlier this year

Enjoy!

(*All data in $ millions)

Company 2014 2015 2016 2017 2018 Five Year Total
Apple Inc. $ 30,638 $ 58,715 $ 48,492 $ 44,764 $ 51,942 $ 234,551
Boeing Co $ 11,029 $ 12,556 $ 20,108 $ 22,914 $ 26,832 $ 93,439
Intel Corp $ 11,197 $ 11,679 $ 13,977 $ 14,796 $ 18,824 $ 70,473
Qualcomm Inc/DE 0 $ 13,337 $ 13,503 $ 14,579 $ 15,149 $ 56,568
Micron Technology Inc $ 6,715 $ 6,658 $ 5,301 $ 10,388 $ 17,357 $ 46,419
Broadcom Inc. $ 2,106 $ 3,675 $ 7,184 $ 9,460 $ 10,305 $ 32,730
NIKE, Inc. 0 $ 3,785 $ 4,237 $ 5,134 $ 6,208 $ 19,364
Applied Materials Inc /DE $ 1,608 $ 1,623 $ 2,259 $ 2,746 $ 5,113 $ 13,349
3M Co 0 $ 2,945 $ 2,799 $ 3,255 $ 3,574 $ 12,573
Walmart Inc. 0 0 0 0 $ 10,702 $ 10,702
Danaher Corp /DE/ $ 1,728 $ 1,553 $ 1,799 $ 2,012 $ 2,357 $ 9,448
Cummins Inc $ 1,446 $ 1,451 $ 1,544 $ 2,137 $ 2,641 $ 9,219
Advanced Micro Devices Inc $ 2,324 $ 1,145 $ 1,108 $ 1,747 $ 2,516 $ 8,840
Corning Inc /NY $ 2,985 $ 2,710 $ 2,923 0 0 $ 8,618
Smith A O Corp $ 692 $ 787 $ 1,775 $ 2,064 $ 2,142 $ 7,459
Corteva, Inc. $ 2,325 $ 2,067 $ 2,200 $ 818 0 $ 7,410
Qorvo, Inc. 0 $ 1,601 $ 1,866 $ 1,540 $ 2,295 $ 7,302
Skyworks Solutions, Inc. $ 1,574 $ 2,249 $ 971 $ 1,019 $ 1,322 $ 7,136
Borgwarner Inc $ 885 $ 1,009 $ 1,218 $ 1,560 $ 1,801 $ 6,473
Nvidia Corp 0 0 $ 1,305 $ 1,896 $ 2,801 $ 6,002
Air Products & Chemicals Inc /DE/ $ 807 $ 958 $ 1,020 $ 1,143 $ 1,586 $ 5,514
Freeport-Mcmoran Inc $ 790 $ 688 $ 1,125 $ 1,136 $ 873 $ 4,612
Conocophillips $ 1,701 $ 782 $ 551 $ 712 $ 836 $ 4,582
Maxim Integrated Products Inc $ 947 $ 837 $ 843 $ 885 $ 813 $ 4,326
Fortive Corp $ 498 $ 501 $ 995 $ 1,111 $ 1,138 $ 4,243
Johnson Controls International plc 0 $ 0 $ 0 $ 2,046 $ 2,166 $ 4,212
Medtronic plc $ 1,013 $ 1,495 $ 1,589 $ 0 $ 0 $ 4,097
Agilent Technologies, Inc. $ 543 $ 693 $ 839 $ 900 $ 1,015 $ 3,990
Avery Dennison Corp $ 0 $ 0 $ 1,140 $ 1,300 $ 1,430 $ 3,870
Analog Devices Inc $ 459 $ 511 $ 576 $ 843 $ 1,210 $ 3,599
Amphenol Corp /DE/ $ 1,441 $ 1,676 0 0 0 $ 3,116
Arconic Inc. $ 415 $ 565 $ 582 $ 615 $ 632 $ 2,809
National Oilwell Varco Inc 0 $ 1,623 $ 557 $ 298 $ 231 $ 2,709
Merck & Co., Inc. 0 0 0 0 $ 2,184 $ 2,184
Ipg Photonics Corp $ 245 $ 312 $ 358 $ 621 $ 629 $ 2,166
Waters Corp /DE/ $ 239 $ 279 $ 331 $ 387 $ 443 $ 1,679
Mettler Toledo International Inc/ $ 404 $ 363 $ 375 $ 439 0 $ 1,582
Perkinelmer Inc 0 $ 297 $ 337 $ 375 $ 560 $ 1,568
Mosaic Co $ 191 $ 205 $ 171 $ 206 $ 232 $ 1,006
Illumina, Inc. 0 0 0 $ 292 $ 365 $ 657
Fortune Brands Home & Security, Inc. 0 0 0 $ 202 $ 261 $ 463
Align Technology Inc 0 0 0 $ 082 $ 156 $ 237
Ansys Inc 0 0 0 0 $ 114 $ 114
Verisign Inc/CA 0 0 0 0 $ 107 $ 107
Idexx Laboratories Inc /DE 0 0 0 0 $ 58 $ 58
Hanesbrands Inc. 0 $ 5 $ 5 $ 8 0 $ 19

Tracking  Pension Data in Calcbench
Wednesday, October 9, 2019

You may have seen news recently that General Electric ($GE) is freezing pension benefits for 20,000 employees, to help the company close an $8 billion deficit in its pension plan.

We at Calcbench love financial data analytics so much that we plan to keep working until we die. Still, GE’s news is a reminder that corporate pension liabilities are still a big issue — and Calcbench offers numerous ways for financial analysts to understand exactly how big that issue might be for firms you follow.

For example, in our Data Query Tool, we track dozens of footnote disclosures a firm might make about its pension obligations. Scroll to the lower portion of the page and you’ll see a laundry list of “footnote points” we track in corporate filings. Look for “Employee Benefits & Pension” and you’ll see a sub-menu of several dozen more data points we track within that category — everything from defined-benefit plan obligations; to maximum and minimum discount rates; to expected future benefit payments due in coming years. See Figure 1, below.



Mark whatever pension data you want to track, for whatever companies you want to track (don’t forget how to set peer groups you want to research), and then the whole thing is delivered to you via Excel for further analysis.

You can do much the same research on our Multi-Company Page, using the standardized metrics search field on the left side of your screen. Those metrics are the same data points we cited above; on the multi-company page, you can compare them quickly on your screen across numerous companies or other metrics. (Say, defined-benefit obligations compared to total liabilities, among the Dow Jones Industrials — you can get that on your screen in a snap.) See Figure 2, below.



And of course, you can always search our Interactive Disclosure Page for detailed, narrative disclosure of pension items that firms report in the footnotes. Firms do sometimes report pension costs under various headings, so the simplest trick here might be to search “pensions” in the text field and see what comes up.

For real, many firms do still offer pensions and report costs related to those benefits. You won’t just get, “Ha! You’re kidding, right?” when you go looking.

To demonstrate how much pension accounting can matter, we looked at all the discount rates for firms that still offered pension plans in 2018. You can see the scatter plot, below.



Most firms use discount rates somewhere near 4 percent — but many use discount rates below that figure. A few brave filers even use discount rates of zero.

Remember that companies use the discount rate to determine the cost of future benefits, and thus what they must contribute today to cover those benefits in the future. The contributions move in step with the discount rate — so the lower your rate is, the more confident you are that your plan’s current value will endure over time, and the less you need to contribute today.

So if Firm X uses a discount rate of zero, does that seem like a reasonable number, or something you might step in while crossing a cow pasture? That’s for you to decide. Calcbench just serves up plenty of data to help you make your decision.


Our latest research report is now available: an in-depth look at how the new accounting standard for leasing costs is affecting the retail sector — and oh boy, it’s affecting that sector in a big way.

You can find the complete report on the Calcbench Research page. Our main finding is that thanks to this new accounting standard, formally known as ASC 842, major retailers are seeing significant spikes in their assets, liabilities, return on assets, and other key performance metrics — all due to a change in accounting rules, rather than any fundamental change in business operations.

ASC 842 requires firms to list the costs of operating leases as liabilities on the balance sheet, along with a corresponding “right-of-use asset” on the asset side. Since retailers generally lease large amounts of commercial space, we wanted to see how the new standard has altered their financial disclosures.

To do that, we compared the financial data reported by 36 retailers as of Q4 2018, just prior to ASC 842 going into effect; against disclosures reported in Q2 2019, after the standard arrived.

The results? See Figure 1, below.



As you can see, the adjustments that firms made, for both ROU assets and operating lease liabilities, exceeded the change in total assets and liabilities for our sample. In other words, all of the change in assets and liabilities — and those numbers jumped 11.8 and 16.6 percent, respectively — was due to implementing ASC 842.

We then did a comparison of assets and liabilities for each of the 36 retailers in our sample — which included firms such as Abercrombie & Fitch ($ANF), Krogers ($KR), Walmart ($WMT), J.C. Penney ($JCP), and Ross Stores ($ROST), among others. Even at the individual level, most firms owed all their fluctuations in assets or liabilities to ASC 842.

And the Performance Metrics

We also studied how those changes affected return on assets and debt-to-equity ratios. ROA is calculated as net income divided by total assets, which means an increase in assets will drive a firm’s ROA down. Debt-to-equity ratio is calculated as total liabilities divided into stockholder equity, so an increase in liabilities will drive that ratio up.

Sure enough, that’s what we found in the retail sector when we ran the numbers.

The ROA calculation is a special case. For all 36 retailers, ROA actually did rise even with the arrival of ASC 842, but that’s because Walmart had a stellar second quarter with gobs of net income, which had an outsized effect on the whole group. Excluding Walmart, the other 35 retailers actually saw ROA fall with the arrival of ASC 842. See Figure 2, below.



Our paper then considers a few specific firms and their changes to ROA and debt-to-equity. Suffice to say, one can find numerous examples of firms with worse return on assets or D/E ratios solely because of ASC 842 and the accounting change. Exclude those operating lease items, and the metrics look better.

Calculating NPV

Liabilities definitely seem to be where the action is with ASC 842. The standard forced a large increase in liabilities than in assets, and higher debt-to-equity ratios can cause headaches like triggering debt covenants with your lenders.

So as Part III of our study, we examined how firms calculated the net present value (NPV) of those liabilities. That number can depend significantly on the discount rate a firm uses, as well as the average remaining term on its leases. We dot-plotted those numbers on a chart.

Figure 3, below, shows the discount rates. See that one outlier, near 12 percent? That’s J.C. Penney.



Anyway, if you’re an analyst who follows the retail sector, download the paper and have a look. Let us know what you think, or what else we should examine in future reports about the leasing standard. We’ll also be publishing more reports on ASC 842’s effect in other sectors, so stay tuned.


Alibaba and Cloud Computing
Thursday, September 19, 2019

Alibaba ($BABA) is that giant Chinese technology company that claims to do just about everything. Imagine Amazon, eBay, Venmo, Netflix and more, all rolled into one business.

Well, we were skimming Alibaba’s financial numbers the other day, and found something else the company does — lose money on cloud computing.

We didn’t think such a thing was possible, because the economics of cloud computing are so simple. You buy computer servers and rent out space to customers. It’s not a new business model, and anyone with an online presence needs some sort of cloud computing. Losing money at cloud computing is like losing money when you own a casino.

Yet, somehow, Alibaba has done precisely that for at least three years running.

See Figure 1, below. These are the operating segments Alibaba reported in 2018 and 2019 (priced in Chinese renminbi). Cloud computing is the second segment listed, and we flagged the money-losing portion in blue.



So how rare is it to lose money in cloud computing? Calcbench can tell you.

First, we held our cursor over that (5,508) loss to find out how Alibaba tagged that number. As one would expect, the tag is “OperatingIncomeLoss.”

When you know the XBRL tag on a piece of financial data, you can then use our XBRL Raw Data Query page to find all other companies that use the same tag. Yes, many companies do use the OperatingIncomeLoss tag — but only a handful use that tag and cross-reference it to include the word “cloud.”

Indeed, for calendar 2018 we found five firms that used those tags in their filings at all, and only three of them are companies you’ve ever heard of:

  • Microsoft: $13.92 billion Operating Income from Cloud
  • Oracle: $21.587 billion Operating Income from Cloud
  • Alibaba: $776.2 million Operating Loss from Cloud (converted from renminbi).

We can think of other firms that also offer cloud computing services under another name. Amazon Web Services, for example, would technically qualify as cloud computing (it’s data storage via the cloud), although Amazon cross-references to its own secondary tag (technically called a “dimension”) dubbed “AmazonWebServicesSegmentMemeber.”

Like Microsoft and Oracle, however, AWS also makes gobs of money: $25.6 billion in revenue last year and $7.3 billion in profit. (Do the math, and AWS may take over the world around 2046 or so.)

Searching the Text Disclosures

So anyway, why does Alibaba lose money on cloud computing? First we found this description of what that line of business is, from the company’s annual report:

The Company’s cloud computing segment is comprised of Alibaba Cloud, which offers a complete suite of cloud services including elastic computing, database, storage, network virtualization services, large scale computing, security, management and application services, big data analytics, a machine learning platform and Internet of Things (“IoT”) services.

OK. That’s no help.

The MD&A provides a few more statistics about the overall growth of Alibaba’s cloud computing. For example, cloud revenue increased 84 percent from 2017 to 2018, “primarily driven by an increase in average spending per customer.”

That’s nice news unto itself, but cloud revenue was only 7 percent of Alibaba’s overall revenue. So this is a fast-growing segment for Alibaba, but it’s still a small segment — and we still don’t know why the firm is losing money.

One hint came in a discussion of cost of revenue. Alibaba did say costs were up “in bandwidth and co-location fees and depreciation expenses as a result of our investments in our cloud computing,” among other items.

So maybe — maybe — Alibaba’s losses in cloud computing are growing pains. The company says demand is growing for sophisticated cloud-based services like network virtualization. Investment to deliver those sophisticated services ain’t cheap. Maybe the investments now will pay off in black ink for the cloud computing segment later.

Then again, Alibaba has been reporting losses in cloud computing for three straight years. We’ll be curious what the company reports sometime next spring with its next annual report.


Introducing Critical Audit Matters
Monday, September 16, 2019

Financial analysts have another disclosure to consider when you’re trying to evaluate the strength of a company: critical audit matters (CAMs), published by a company’s external audit firm.

CAMs started arriving in corporate annual reports earlier this summer, and you’ll see many more filers start including CAMs in annual reports next year. They are important issues in a firm’s financial reporting processes (hence the “critical” part) as identified by the firm’s external auditor.

CAMs do not necessarily mean anything is amiss with the filer’s financial data, although that can be the case sometimes. Rather, CAMs refer to items in the firm’s financial statements that both (a) are material to the financial statements; and (b) involve “especially challenging, subjective, or complex auditor judgment.”

So CAMs are really a glimpse into which issues an audit firm identifies as potentially important, either because an issue is hard to quantify (say, the precise value of thinly traded derivatives) or because a company’s internal controls for that item aren’t as bulletproof as the audit firm would like those controls to be.

This is a big deal because until now, most audit reports have been pretty boring. In most cases, those reports simply confirmed that the firm’s financial data seems reliable and in accordance with U.S. Generally Accepted Accounting Principles — nothing more. Nice to know, but not terribly informative for financial analysts.

Most firms will have at least one CAM in the auditor’s report; some might have numerous CAMs. Those CAMs might also change over time, as a company updates its internal controls or changes its financial operations.

Large filers had to start including CAMs in their audit reports for fiscal years ending on or after June 30, 2019 — so we’ve seen some CAMs already from filers with June 30 fiscal year-ends, and we’ll see lots more by spring 2020. Smaller firms will start including CAMs for annual reports filed in 2021.

How to Find CAMs in Calcbench

Start at our Interactive Disclosures page. From the “choose footnote/disclosure type” menu on the left, select “Report of Independent Registered Public Accounting Firm.” Then in the text search field on the right, enter “critical audit matters” to see what comes up. See Figure 1, below.



Right now you won’t see too many results, since not too many large filers work on a June 30 fiscal year-end. But we did find some, and have examples below.

Brady Corp. ($BRC) reported a valuation allowance related to taxes as a CAM. The audit firm (Deloitte & Touche) had this to say:

The Company recognizes deferred income tax assets and liabilities for the estimated future tax effects attributable to temporary differences and carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future…

The Company’s determination of the valuation allowance involves estimates. Management’s primary estimate in determining whether a valuation allowance should be established is the projection of future sources of taxable income. Auditing management’s estimate of future sources of taxable income, which affects the recorded valuation allowances, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists.

Cisco Systems ($CSCO) reported this CAM related to revenue recognition, as described by audit firm PwC:

As described in Note 2 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Management applies judgment in determining the transaction price, which is dependent on the contractual terms. In order to determine the transaction price, management may be required to estimate variable consideration when determining the amount and timing of revenue recognition.

The principal considerations for our determination that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized nature of the Company’s customer arrangements.

In each case, the audit firm then explained the procedures it used to try to understand the CAM as much as possible. That’s part of what audit firms must now report for CAMs as dictated by accounting industry regulators.

So that’s the critical information about critical audit matters. They can help a financial analyst understand what’s important to watch in corporate financial statements, and how audit firms are approaching those issues.

How you approach those issues is up to you. Calcbench is here to give you a clear path to finding them.


Our Fireside Chat on Goodwill Assets
Wednesday, September 11, 2019

Devotees of goodwill assets and impairments, rejoice! Calcbench and Valuation Research Corporation have just released a “fireside chat” to discuss the growth of corporate goodwill on the balance sheet, goodwill impairment, and techniques financial analysts can use to perform their own assessment of goodwill value.

You can see the video on YouTube, and we’ve embedded it below as well. The speakers are Pranav Ghai, CEO of Calcbench; and PJ Patel, co-CEO the Valuation Research Corporation. Their discussion was moderated by Matt Kelly, editor at Radical Compliance.

Understanding how companies decide on the value of a goodwill asset, and how to identify assets that might be overpriced and due for an impairment sometime in the future — that’s a critical part of financial analysis. We talk about those things extensively in the video.

Why is goodwill so important? For starters, it crops up in corporate mergers all the time. Goodwill is the value an acquiring company places on a target company, above that target’s book value. For example, say Company A has $100 million in inventory and another $50 million in intangible assets (business contracts, trademarks, and so forth), for a book value of $150 million. Company B then acquires Company A for $200 million.

That $50 million extra is goodwill. It might be ascribed to Company A’s reputation in the marketplace, or loyalty of employees, or other hard-to-define qualities that make Company A worth more than the sum of its parts.

As you’ll see in our video, goodwill is an increasingly large part of the corporate balance sheet. Total goodwill assets among the S&P 500 is more than $3 trillion. It rose 38 percent from 2014 to 2017.

On the other hand, goodwill can also be impaired, when a company decides the asset isn’t worth as much as originally thought. Impairments hit the income statement in the period they’re reported, leading to potentially large losses. They’re also embarrassing to the firms that announce them.

So Ghai and Patel review statistics about the growth in goodwill among the S&P 500; preliminary calculations valuation specialists use to assess what goodwill should be; how to find goodwill as part of an M&A deal (Calcbench tracks that stuff, you know); and warning signs that suggest impairment may be coming soon.

Let us know what you think, and if you have questions always feel free to email us at info@calcbench.com. Enjoy!


Pulling Forward Share Buybacks
Friday, September 6, 2019

We saw an interesting item on MarketWatch the other day that might make the financial analyst’s heart go pitter-patter: Starbucks ($SBUX) warned investors that 2020 profit growth will be lower than expected, because the company is spending more money now on share repurchase programs.

As financial disclosures go, this one was rather quirky. Because Starbucks’ share price has been accelerating so rapidly this year, the company decided to spend more money now on its repurchase program — fearing that shares will be even more expensive in the future. So that cash won’t be there in 2020, so profit growth on an earnings per share basis will be lower.

That’s one way to be a victim of your own success. So how could Calcbench help you identify firms that might face a similar predicament?

One place to start is by studying which firms have large piles of cash relative to total assets. That’s easy to do. Go to our Multi-Company database and select the company or companies you want to research. By default, one of the financial categories displayed will be assets. You can then add cash as another column by typing that into the standardized metrics field on the left side of the page. (See Figure 1, below.)



You could then download that data into Excel, divide cash into total assets, and get a sense of which firms have a relatively large amount of cash available. They’d be logical candidates for share buyback programs.

You’d still want to research whether those firms also have other obligations, such as an upcoming debt payment or other liabilities. Fundamentally, however, you want to start by finding firms that have a lot of money tucked away. This is how you’d do that in Calcbench.

One you have those firms identified, you’d need to study which ones have had large (some might say unwarranted) run-ups in share price. That makes shares more expensive, so companies would therefore be able to buy fewer shares. Which means more shares still outstanding, so EPS doesn’t increase as much as you want; the denominator (shares) is still too large.

You would also want to know the number of shares the company has issued, and what’s become of them lately. Calcbench has a lot of data on that point, all available in the standardized metrics field. For example…

  • Shares issued: all the shares the company has issued, regardless of who owns them;
  • Shares in treasury: shares the company issued and then re-acquired, such as when the company buys back shares and keeps them tucked away;
  • Shares outstanding: shares the company has issued that are still floating around, owned by investors;
  • Stock repurchased during period: the number of shares a company bought back;
  • Treasury stock acquired, average cost: how much the company paid for shares it has tucked away in the treasury.

You get the idea. Calcbench has many ways to give you a sense of how many shares are available for repurchase, and how many the company has already repurchased.

So if a firm has lots of liquidity (that is, cash to spare), plus a rapid run-up in share price, that means fewer shares repurchased in the future (because the shares will be more expensive), so lower EPS growth (because more shares are still out there). That’s when a firm might consider pulling forward its share buyback spending from tomorrow into today.

To be honest, issues like this only worry people who obsess about EPS. If you care about other fundamentals like operating income or revenue growth, financial engineering like this is less of a concern. As one analyst in the MarketWatch article said:

“All in, while there doesn’t appear to be any change in [Starbuck’s] broader fundamental outlook …, these adjustments are a reminder that the [Starbucks] story is complicated and that growth is not always poised to proceed in a linear fashion,” analyst Bonnie Herzog at Wells Fargo wrote in a note to clients.

Totally true, and a point not exclusive to Starbucks. Calcbench can help you find those others because whatever financial data you want to pull out and study — we have it, ready for the pulling and studying.


A Quick Catch-Up on VMWare
Saturday, August 31, 2019

Once upon a time — two years ago, to be precise — Calcbench spent a lot of time writing about the then-new accounting standard for revenue recognition.

In particular, we warned that software firms with subscription-based sales models might see more volatility in their quarterly results, because the new standard would require them to recognize more revenue from a long-term contract immediately. So the revenue for any specific quarter might increase (yay!) but fluctuations from quarter to quarter would be more pronounced (boo!).

The firms most at risk for this phenomenon would be those with large amounts of deferred revenue relative to current liabilities. Back in August 2017 we wrote a white paper on the subject, and even identified 11 software firms where deferred revenue exceeded current liabilities by 100 percent or more. They would be the firms most prone to what we’re talking about.

OK two years later, that new revenue recognition standard is now in cemented place. So what happened?

We decided to take a fresh look at VMWare ($VMW) to get a sense of things.

In 2016 VMWare had a deferred revenue-to-current liabilities ratio of 123.5 percent. That was far above the industry average of 47.7 percent, and placed VMWare second on our list of 11 firms. (Web.com was first, but it went private in 2018.)

Figure 1, below, shows VMWare’s quarterly revenue from 2015 through Q2-2019. The new accounting standard went into effect at the start of 2018, when revenue landed pretty much at $2 billion on the nose.



That revenue flow does look more jagged after Q1 2018 than prior to it. Sure enough, in the disclosures VMWare made for its 10-K filed on March 29, 2018, the company said: “Under Topic 606, VMware would generally expect that substantially all license revenue related to the sale of perpetual licenses will be recognized upon delivery.”

We don’t know how much those perpetual licenses account for all licensing revenue; VMWare doesn’t report that separately. And whatever those effects of the standard might be, the market has digested them. VMWare’s share price rose from $96 two years ago to a high of $200 in May, although it’s dropped to around $132 lately.

Still, let it never be said that Calcbench forgets its roots. The new lease accounting standard may be the sexy thing now, but we try to revisit old issues (like revenue recognition) from time to time.)


We’ve all seen the press releases time and again: Company ABC discloses tough times in an earnings release, and proposes a sweeping plan that will include X number of dollars in “restructuring charges.”

Well, how much has all that restructuring actually cost over the years?

We’ve examined this issue from time to time, including looks at specific companies and how their costs might change from the start of a restructuring plan (usually three years) to the end. This time around we asked a simpler question: How much have all companies reported in restructuring charges for the last several years?

So we visited our Multi-Company database page and searched all companies that have included a number tagged “Restructuring Charge” over the last six years. The results are below.



As you can see, total restructuring charges have ranged from $25 billion to $45 billion. The trend line (in red) slopes upward, but that looks like it’s due to a bulge in restructuring charges in the middle of the decade rather than any inexorable progression upward.

In Figure 2, below, we have average restructuring charge per filer. Same phenomenon of the trend sloping upward, although the steep drop in charges in 2018 gives us hope.



We won’t know for sure what the bigger trend is until 2019 numbers arrive next spring, but perhaps the bulge in 2016 and 2017 was an aberration.

In total, firms spent $235.68 billion in restructuring charges 2012-18. Who were the biggest spenders? Table 1, below, gives us the Top 10 list.




WeWork Liabilities, Part II
Wednesday, August 21, 2019

Our previous post looked at WeWork’s operating lease liabilities in sheer dollar terms — and without quesiton, in sheer dollar terms those liabilities are enormous. WeWork has the largest operating lease liabilities of any filer out there, by far.

Then we tried to put those leasing liabilities into a more relative perspective. And if you look at them in the right light, WeWork isn’t the only company betting so much of its operations on operating leases.

What did we do? Simple.

Start with the present value of a company’s operating lease liabilities, which all firms are now required to report on the balance sheet. Divide that number into total liabilities, expressed as a percentage. That lets you see what portion of all liabilities stem from operating leases.

We did that for all firms with more than $1 billion in total liabilities, and then sorted them for the five with the highest percentages. The results are below, with WeWork appended at the bottom.



So WeWork isn’t the firm with its balance sheet most entangled in operating leases. Yes, in dollars WeWork dwarfs everyone else, but in relative terms we have at least a few firms even more wrapped up in operating lease liabilities than WeWork is.

We’ve written about Chipotle ($CMG) in previous posts, and Five Star Senior Living also features in our recent in-depth report about operating lease liabilities, too. Of course, one big difference among these five firms above and WeWork is that these firms actually make a profit from operations — something that has eluded WeWork so far, and when the company might need black ink to print its bottom line is anyone’s guess.


WeWork’s Liabilities in Perspective
Tuesday, August 20, 2019

By now any financial analyst worth his or her salt, or with lots of time on your hands because all the managing partners are on vacation, has seen news that WeWork has filed a registration statement to go public.

You might also have seen the big item in that registration statement: WeWork’s $33.95 billion in operating lease liabilities.

Sure, that’s a staggering amount of money — but how staggering, exactly? Calcbench decided to investigate.

We pulled up a list of all publicly traded firms and ranked them by operating lease liabilities. Just for kicks, we also included those companies’ revenue and operating income for the first half of 2019. See Figure 1, below.



The numbers pretty much say it all. Whenever WeWork goes public, it will have the largest operating lease liabilities of any public company, by far. Its two most important financial metrics, meanwhile, won’t be anywhere near close to what other firms with large operating lease liabilities generate.

So will WeWork be able to scale up operations to meet those future liabilities? Do the numbers above justify the valuation it’s seeking from investors? You tell us. At Calcbench we work hard (Ha! See what we did there?) to bring you the data, so you can make better decisions quickly and easily.


Comparing LinkedIn, Twitter Revenue
Wednesday, August 14, 2019

Fans of the Calcbench blog may know that we often spread news of our posts on LinkedIn and Twitter. So we were wondering the other day: How much revenue do those businesses make, anyway?

Comparing those revenue streams can be a pain, because LinkedIn has been part of Microsoft ($MSFT) since 2016. Yes, Microsoft does report LinkedIn revenue as a separate operating segment; but financial analysts first need to find that data, then carry it over to a spreadsheet with Twitter ($TWTR) revenue data. Less than ideal.

We decided to run this comparison ourselves, to see how much Calcbench databases can reduce that pain. We even included a third social media company, Snapchat ($SNAP), just to give ourselves a bit more challenge. Plus the interns around here tell us that’s what they use these days.

Figure 1, below, shows quarterly revenue for all three companies from the start of 2017 through Q2 2019. As you can see, LinkedIn has always been far larger than the other two, and has been pulling away from them for the last three quarters.



So, conclusion number one: There’s more money to be made catering to professionals worried about their careers, than there is catering to people screeching about politics or posting photos of avocado toast.

That said, we also have some lessons in financial analysis here, since gathering all this data is a bit tricky.

How We Did It

First, we pulled the revenue data for Twitter and Snapchat. That was easy. We visited the Multi-Company page, pulled up quarterly revenue for both firms from Q1 2017 through Q2 2019, and exported it to Excel. Finis.

Step 2 was to find the LinkedIn revenue from Microsoft. We first hit up the Segments & Breakouts page, and searched for Microsoft revenue by operating segment. Microsoft offers a lot of operating segments, including LinkedIn. When you filter for “LinkedIn,” the numbers come right up.

Ah, but wait — Microsoft doesn’t report segment numbers for the second quarter! What gives?

Remember that Microsoft runs on a June 30 fiscal year-end. That means its numbers for the April-June quarter are subsumed into whatever numbers are reported for the whole fiscal year.

To find those second quarter numbers requires an extra bit of math. You need to find cumulative LinkedIn revenue for the first three quarters, and then deduct that amount from the fiscal year’s total. The difference is LinkedIn revenue for that missing second quarter.

Calcbench makes this (relatively) easy. When you see the fiscal year-end total, use our Trace feature to pull up the original footnote disclosure for the operating segment. Move your cursor over that number. A small window appears that includes a “Tag History” option at the bottom. Click on that, and you can see all prior numbers reported for that fiscal year — including the cumulative amount for the last three quarters.

See Figure 2, below, as an example. Microsoft reported $6.754 billion in LinkedIn revenue for fiscal 2019. When we searched the tag history, we found that Microsoft reported $4.919 billion in LinkedIn revenue for the first three fiscal quarters. Therefore, revenue for Q2 2019 must be $1.835 billion.



Run that same calculation for 2018 and 2017, and you fill in the data for our missing Q2s. Then you can compare LinkedIn revenue to that of Twitter and Snapchat.

That’s all there is to it. We pulled together all that data in less than five minutes. After that, all we had to do was write up this summary to post it on LinkedIn and Twitter.


We return today to the new standard for lease accounting, and the profound effects that new standard can have on certain filers. Today we’re going to look at the retail sector.

The retail sector intrigues us because those firms lease huge amounts of space for their stores. So once the new leasing standard (ASC 842) went into effect at the start of this year, and firms had to start reporting all those costs on the balance sheet — what happened to the balance sheet of retailers?

To explore, we compiled a peer group of 21 large retailers to study. Then we visited the Data Query page and looked at total liabilities per quarter, from the start of 2016 through first-quarter 2019. See Figure 1, below.



Look at that spike at the end of the chart. Liabilities jump 18.6 percent — from $354.6 billion at the end of fourth-quarter 2018, to $420.5 billion for first-quarter 2019.

We also know that operating lease liabilities in first-quarter 2019 were $72.4 billion. So if you do the math, all of the increase in liabilities for these retailers came from adopting the lease accounting standard. (In fact, other liabilities actually fell by a small amount in the first quarter.)

But wait, there’s more! ASC 842 also requires firms to report the value of leased items as a “right of use” asset, to offset those liabilities. So we also looked at what the retailers were reporting for total assets.

As you can see in Figure 2, the same spike happened for assets. They jumped $61.79 billion in Q1 2019, an increase of 12.3 percent.



Again, this is entirely due to the retailers reporting right-of-use assets on the balance sheet. Those ROU assets totaled $66.4 billion in Q1 2019. So just like liabilities for this group, assets actually would have declined at the start of this year had it not been for a new accounting standard.

Let’s also remember that operating lease liabilities were $72.4 billion, while ROU assets were $66.4 billion — a difference of $6 billion. One question would be whether retailers are paying too much for those leased assets. That’s not necessarily the case, but considering the long-term decline in shopping mall traffic, it’s a legitimate point to ponder. If you found a gap like that in a specific retailer, you might want to follow up with questions about foot traffic, TTM sales, and the like.

Calcbench is preparing a more in-depth report looking at a larger set of retailers and ASC 842. That will be out in the next two weeks or so. Stay tuned.


Using Calcbench to Find China Exposure
Thursday, August 1, 2019

President Trump tweeted today that he will raise tariffs again on some $300 billion of Chinese imports coming into the United States, starting Sept. 1. What’s the Calcbench play on that news? A reminder of how you research firms’ exposure to China in our databases!


One place to start is our Segments, Rollforwards, and Breakouts page. This is where you can research what firms report by various sub-categories, including geographic and operating segments.

For example, Figure 1 below is a look at the disclosures by geographic segment that Apple ($AAPL) makes. Apple only reports this segment revenue annually, not quarterly; but it does report both revenue and property, plant & equipment.



The PPE number is especially interesting to us, because Trump’s tariffs won’t affect Apple sales in China; they will only affect goods manufactured in China and then imported back to the United States. Apple’s PPE investments in China give us a sense of its manufacturing capacity there, which can give you a sense of the hit to sales that tariffs might cause here.

If you’re looking at a group of companies, be warned: the results can get unwieldy if you don’t narrow your search parameters. For example, if you search segment disclosures among the S&P 500, Calcbench will give every segment reported by every firm its own line.

To avoid that, you want to enter text in that “Filter” field at the top of the Segment column — and you might need to use some creativity. Obviously you can enter “China” or even just “Chi” to filter the results, but you might also want to enter “Far East,” “APAC,” “Hong Kong” or similar phrases.

Look closely at the results from those filters, too. For example, we’ve seen “China” return “China excluding Hong Kong” and “Asia excluding China.” You’d want to make note of those results and continue searching accordingly.

Figure 2, below, shows some results from the S&P 500, this time for Q1 2019. Again, we see some firms reporting both revenue and PPE. We also see Boeing reporting “Asia other than China,” and thank the company for proving the point we just made above.



Using the Segments page, you could identify firms with large exposure to China (say, ranking them by PPE or assets in China) and then tailor your investment strategies accordingly.

Narrative Discussion

You can also visit the Interactive Disclosures page to search for footnote discussion of China, tariffs, trade tensions, or anything else, really. Simply select the company (or companies) and the period (or periods) that you want to research; and then type “China” or “tariffs” or whatever into the text box on the right side. See what results come up, and go from there.


Leasing Details: The Comcast Example
Tuesday, July 30, 2019

Our exploration of the new accounting standard for leases continues today with a look at how companies can adopt the new standard’s disclosure rules, yet still not report leasing costs and assets specifically on the balance sheet.

Yes, that’s possible. Case in point: Comcast Corp.

First, let’s remember what the new standard (ASC 842, Leases) seeks to accomplish. Companies must report the costs of operating leases as liabilities on the balance sheet, rather than keep those numbers tucked away in the footnotes. Companies are also supposed to report the value of leased items as right-of-use (ROU) assets on the asset side.

The leasing standard went into effect at the start of 2019. Since then we’ve seen many companies report those leasing assets and liabilities as individual line items on the balance sheet, clear and easy to find. (You can see our prior coverage of leasing disclosures in our blog archives, and don’t forget our special report on leasing costs among the S&P 500.)

One small point, however — companies don’t necessarily need to report leasing costs and assets as separate line items. Which brings us to Comcast ($CMCSA).

Technically, ASC 842 allows companies to include the amounts of lease assets and liabilities within other line items on the balance sheet, so long as the detailed amounts are clearly reported in the footnotes. That’s what Comcast does.

See Figure 1, below, which lists Comcast’s assets for the first two quarters of 2019. An item for ROU assets is not there.



But if you dive into Comcast’s footnotes, in the Accounting Policies section, Comcast says this about the effect of the new leasing standard: “Upon adoption, we recorded $4.2 billion and $4.8 billion for operating lease assets and liabilities, respectively.”

Then Comcast refers readers to Note 11, the Commitments and Contingencies section. There, Comcast reports $4.1 billion in ROU assets and $4.7 billion in liabilities (apparently each item declined a bit between start and end of Q1), which are rolled into Other Noncurrent Assets and Other Noncurrent Liabilities, respectively.

Other Noncurrent Assets were at $8.64 billion in Q1, and Other Noncurrent Liabilities were $18.81 billion. So clearly Comcast has indeed reported its leasing expenses. It just reported them in a way that leaves the numbers hard to find unless you know how the ASC 842 standard works, and where to look for the fine print.

More Details

Another fun fact: a company cannot report operating and financing leases in the same line item. So while Comcast reports its operating lease ROU assets in Other Noncurrent Assets, it reports the assets for its finance leases in the Property, Plant & Equipment line. Likewise, the liabilities for finance leases are rolled into Long-Term Debt.

All of that is disclosed in the footnotes. Comcast has done nothing wrong. Critics might say that Comcast still hasn’t fulfilled the spirit of ASC 842, since the point of the standard was to make leasing items more visible to investors.

Calcbench takes no view on that argument. We only want to note that companies can report numbers this way, and Comcast is not alone in doing it.

Calcbench offers a few solutions here. First, you can use our Interactive Disclosures page to search the footnotes, including text searches for “operating leases.” We always recommend reading the footnotes, so that’s one idea.

Second, you can use our Multi-Company page to search for leasing disclosures. You can search either by standardized metric or by XBRL tag, and we will pull those morsels of data from the footnotes, no matter what a company reports on its balance sheet.

Either way, you’ll get the data you need. Calcbench has you covered.


Now it is easy to get started doing fundamental analysis in Python with the Calcbench API client. If you are an equity analyst who wants to move beyond Excel this is a good place to start. 

Calcbench has added our Python API client to the PIP index. Assuming you have Python installed on your computer you can install the client with- pip install calcbench-api-client 

If you do not already have Calcbench credentials you can sign up for a two week free trial @ calcbench.com/join

Calcbench has created easy to read documentation for the Python API client @ http://calcbench.github.io/python_api_client/html/index.html

Once you have installed the API client and have your Calcbench credentials you can find examples of analysis @ https://github.com/calcbench/notebooks

If you have questions email me @ andrew@calcbench.com.


Students of corporate tax rates might have seen a front-page article in the Wall Street Journal today exploring how the tax cuts of 2017 have changed effective tax rates for large public filers.

We certainly noticed the article — because it’s based on Calcbench data!

Of course we’re flattered that the Journal would rely on us for their calculations. Calcbench has been tracking corporate tax disclosures, including effective tax rates and the adjustments that filers make to arrive at those numbers, for years. You can find them using the standardized metrics we offer on our Company-in-Detail and Multi-Company databases; or by searching text disclosures in our Interactive Disclosure page.

We recommend reading the full article, but the heart of the tale is told in these lines:

[Q1 2019] marked the third straight quarter [with median tax rates] below 20 percent, and is consistent with the goals and structure of the tax overhaul, which lowered the federal corporate rate to 21 percent from 35 percent. The law’s authors wanted to help U.S. multinationals compete in foreign markets and aid domestic companies with high tax burdens, while reducing the value of tax breaks and making it harder to achieve single-digit tax rates.

Much of the decline is coming because fewer firms are paying rates at the highest end, according to the Journal analysis.

Throughout 2018 and 2019, Calcbench has looked at specific examples of that trend. We found some firms with much higher effective rates during transitional periods in 2018; we found other firms with effective rates that plummeted; and still more firms whose effective rates have kinda sorta stayed flat. You can search our blog for “tax reform” and find a long list of posts on the subject.

One fine point: The WSJ article did include a line, “Companies typically don’t make public what they pay the Internal Revenue Service each tax year.”

Calcbench actually does track “Income Taxes Paid” from the Statement of Cash Flows. That is the amount of money a filer hands over to the IRS in a given fiscal year. It’s not the same as Provision for Income Taxes on the income statement, since that provision can include all sorts of deferred items or other adjustments.

But Calcbench has you covered for all things tax, no matter how specific you want to be. We got the data.


Downshifting in the Trucking World
Wednesday, July 17, 2019

We noticed that Knight-Swift Transportation ($KNX) updated its earnings guidance today, and the update was not good.

The company said adjusted EPS for the second quarter will likely arrive at $0.57 or $0.58, rather than the originally forecast $0.63. Third-quarter adjusted EPS will also likely decline from earlier estimates, although Q4 will move higher and 2020 looks good so far.

The downgrade was “primarily a result of the oversupply of capacity in the truckload freight market that resulted in greater than expected downward pressure on revenue per loaded mile,” the company said. “We expect these trends to continue through the back half of the year.”

OK, Knight-Swift, thanks for the tip. So how can Calcbench subscribers use that one morsel of insight to see what other transportation companies are saying about possible slowdowns?

Easily, actually. Here’s how.

First, you can find a company that files an earnings release or guidance by scanning our Recent Filings page on a regular basis. For example, we had Knight-Swift’s earnings guidance indexed in our database at 9:03 a.m. today, roughly one minute after the company had filed it with the SEC. So obviously you should sit in front of your computer all day long, refreshing our Recent Filings page constantly.

When you read that earnings guidance in Calcbench, it resides in our Interactive Disclosures page. Once you’re done absorbing the news, jump to our Company-in-Detail page, using the tab at the top of your screen. You’ll then see line-item financial statements for whatever firm you were just researching on the Disclosures page.

On the Company-in-Detail page, you can see several peers of the company you’re researching listed in the upper-right corner. See Figure 1, below, with the black arrow. In this case we’re looking at five peers of Knight-Swift: Hunt Transport Services; Schneider National; Old Dominion Freight; Werner Enterprises; and YRC Worldwide.



Click on those ticker symbols, and Calcbench whisks you to the financial information for those firms. Then you can hop-scotch back to the Interactive Disclosures page for any of them, to see what they said in their latest earnings release or guidance.

So that’s no more than six clicks, to go from discovering that Firm X has published an earnings release, to reading it, to finding its peers, to seeing whether they’ve said anything similar in their latest earnings releases.

At random, we picked Hunt Transport Services ($JBHT) as one of Knight-Swift’s peers to examine, and discovered that Hunt had also filed a Q2-2019 earnings release today. (For real, we didn’t plan that.) Lo and behold, Hunt reported lower earnings compared to the year-ago period, although revenue rose 6 percent to $2.26 billion.

Further down, however, Hunt talked about declining load volumes for its trucking business. Then again, there was no mention in this earnings release about future guidance (either better or worse), so we’re not quite sure what’s going.

Then again, Calcbench is just the data source — we don’t need to know what’s going on. You do. Our job is to help you understand what’s going on by providing timely, precise, easily located data. This is one example of how we do that, day in and day out.


Devout readers of the Calcbench blog already know how much we love the new accounting standard for leasing costs. Now we have even more for those of you who also follow this subject closely: our latest in-depth look at leasing accounting costs among the S&P 500.

The new standard went into effect at the start of this year. It requires firms to report the costs of operating leases as liabilities on the balance sheet, and also to add a corresponding right-of-use (ROU) asset on the asset side.

In theory, leasing liabilities and ROU assets should offset each other. In practice, most firms have a discrepancy one way or the other between those two items — assets greater than liabilities, or liabilities greater than assets. Our paper examines the S&P 500 to see how large those discrepancies are.

The complete paper is available for download on the Calcbench Research page. Meanwhile, we have a few key findings here.

First, most firms do have discrepancies between assets and liabilities. Among the 382 firms in the S&P 500 that reported leasing items, only 21 had leasing liabilities and ROU assets in Q1 2019 where the values were exactly equal. Most firms had liabilities larger than assets, although a small number did have assets larger than liabilities.

To be clear — the discrepancies themselves are fine. They don’t violate financial reporting rules. The new accounting standard only aims to give investors a better sense of a firm’s assets and liabilities, and discrepancies are allowed. We just found lots of firms fitting that scenario.

Second, those discrepancies do add up. Collectively, those 382 firms had $475.2 billion in assets and $495.8 billion in liabilities. That means leasing liabilities exceeded ROU assets by 4.16 percent. The median firm had $434 million in assets and $446 million in liabilities, a difference of 2.69 percent. (See Table 1, below.)



When you examine specific firms those discrepancies can become significant, in either relative or absolute dollar terms.

For example, AT&T ($T) had $20.23 billion in assets, and $21.32 billion in liabilities. That is, its leasing liabilities were more than $1 billion larger than ROU assets. Meanwhile, Wynn Resorts ($WYNN) had ROU assets of $444.1 million, but liabilities of only $158.6 million.

Our report lists the firms with the largest differences in both absolute and relative terms. The names may surprise you.

Third, this new standard can have big effects on a firm’s balance sheet. Last summer we examined firms that were carrying large leasing liabilities off the balance sheet, under the prior accounting standard. We estimated how those firms’ total liabilities would increase if you added those off-balance sheet leasing liabilities onto the balance sheet. In some cases, total liabilities would increase 300 percent or more.

Now that the new standard is here, we revisited those same firms to see how their balance sheets actually did change in Q1 2019. Most of our predictions were close; a few were larger, and a few smaller.

Regardless, this standard can have a big effect on the balance sheet. That, in turn, has an effect on financial metrics such as return on assets or debt-to-equity ratios — all due to a change in accounting rules, rather than any change to business performance. (We did a deep dive on this issue just last week, looking at Chipotle Mexican Grille ($CMG), if you’re curious.)

Financial analysts need to understand and anticipate those changes in the firms that they follow. This research report provides a sense of what’s to come, and some specific examples that demonstrate the new standard’s practical effects.

You can also use Calcbench’s Company-in-Detail page or our Multi-Company page to further research firms yourself.

It’s a big change, this new lease accounting standard. Rest assured, Calcbench is on top of it and can give you the data you need, every step of the way.


We often talk about the new lease accounting standard on this blog. Today we’re going to explore one specific example of the consequences of the new standard — that is, how a change in accounting rules can lead to changes in a firm’s financial and operating metrics, without any change in actual finances or operations.

Fellow data devotees, we give you Chipotle Mexican Grill ($CMG).

As you might know, the new lease accounting standard requires firms to report the value of operating leases on the balance sheet. The cost of a firm’s operating leases shows up in the liabilities section, while the value of those leases appears in the asset section as a right-of-use (ROU) asset.

For retailers, who lease lots of space, those numbers can be substantial. Since important performance metrics like a firm’s return on assets or its debt-to-equity ratio derive from total assets and liabilities, that means any big shift in total assets or liabilities will also change those metrics.

Chipotle is an excellent example of this. In relative terms, its leasing obligations are substantial. So when it implemented the new standard in Q1 2019, the size of its balance sheet ballooned. Total assets more than doubled from $2.26 billion at the end of 2018 to $4.63 billion in Q1. Total liabilities went from $824.18 million to $3.14 billion — an increase of (gulp) 281 percent.

See Figure 1, below. We zoomed into the liabilities because that’s the bigger shift, but you can also see the shift in total assets near the top.



So what does this mean for Chipotle’s performance metrics? Lots.

We’ll first look at return on assets, calculated as net income divided into total assets. To smooth out any seasonal changes, we’ll compare first-quarter 2018 (before the new lease accounting standard) to first-quarter 2019 (after the standard). See Table 1, below.

Q1 2018 Q1 2019
Net Income $59,446,000 $88,132,000
Total Assets $2,097,444,000 $4,625,482,000
Estimated ROA* 11.3% 7.6%

That’s a steep drop in ROA even after a quite respectable jump in net income, all because a new accounting standard changed the location of where Chipotle reported a number.

Chipotle’s debt-to-equity ratio, calculated as total liabilities divided into total shareholder equity, also changes. See Table 2, below.

Q1 2018 Q1 2019
Total Liabilities $733,399,000 $3,141,683,000
Total Equity $1,364,045,000 $1,483,799,000
Debt to Equity 0.54 2.12

In both cases, we have significant changes in performance metrics without any comparable shift in, ya know, actual performance. This sort of thing will happen to all firms as they adopt the new lease accounting standard — although as Chipotle demonstrates, it will happen to some firms much more severely than others. Changes in those metrics can also have real consequences, such as triggering a debt covenant or perhaps influencing the strategy of some automated trading algorithm out there.

Calcbench automatically presents debt-to-equity ratio when you examine a firm’s balance sheet in the Company-in-Detail page. You can also search for ROA and debt-to-equity in our standardized metrics in the Multi-Company page. And don’t forget, we have leasing research galore on our Research page.

* We annualized Net Income to project the total ROA


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