- Turns out in a business context,
usually there's often not one single thing
for poor or great performance.
Often, it's a series of small issues
that lead to a very big issue.
Let's take a look in a business context
at General Motors and ask this question.
Why did General Motors go bankrupt in 2009?
Turns out there wasn't just one reason,
there were several!
One, they had multiple divisions in the company
that weren't working together.
As a result, there were many cost duplications.
Also, oil prices and external forces
were rising at the time.
In addition, General Motors had some
of the most generous pension and retiree health plans
available to their former workers.
For example, they had a jobs bank
which continued to pay laid-off workers,
even after there was no work for them to do!
And they were also facing a market
with aggressive foreign competitors.
There were a host of things.
Was there one thing that caused General Motors' bankruptcy?
I don't think so.
When we're doing financial statement analysis
and we're looking for one thing,
we'll often be disappointed.
Often, it's more than one thing.
Now, another pitfall occurs when we anchor
on information that may not be as relevant.
Financial ratio analysis uses the past
to help us forecast the future.
The recent past is much more relevant than the distant past.
In a business context, Walmart,
as you can see on the chart, has had massive sales growth.
Up from 153 billion in 2000
to 515 billion in 2019.
But if we look at percentage sales growth
in the first decade of this century, that's 2000 to 2009,
and compare it to the percentage sales growth
in this most recent decade, 2010 to 2019,
we would reach dramatically different conclusions
about future sales growth.
From 2000 to 2009, Walmart's average sales growth
was 12% per year.
From 2010 through 2019,
sales growth averaged just 2.5%.
If we are going to forecast Walmart's
sales growth for the next year,
should we use the percentage growth from 20 years ago,
or should we use the percentage sales growth
from the last couple of years?
My guess is, it would be more relevant to use
the last three or four years to forecast
what the future's going to look like for Walmart.
And finally, we've got to be careful
when using the past to predict the future.
Turns out, the more relevant information is the recent past.
We don't want to go too far back in predicting the future.
So just be careful when doing financial statement analysis.
It's very powerful, when you use it appropriately.