Value of XBRL for Financial Analysis
IMGCAP(1)]Everyone can agree that better financial analysis is a good thing for business leaders.
CFOs nervous about where the economy might go in the future want better forecasting of more complex scenarios. Operations chiefs and private equity firms want better due diligence reviews when considering an acquisition. Boards and audit committees want (desperately) to move from retrospective reviews of financial performance, to more predictive risk management that can help them anticipate problems.
All of those goals hinge on better financial analysis—and XBRL is one proven technology to deliver it.
Once upon a time, XBRL did not have the best reputation among corporate filers, especially smaller public companies. Skeptics (and a fair number are still out there) saw the technology as difficult for corporate accounting functions to implement, without much benefit either to investors or filers.
Now that we’re here, however—now that Corporate America has a respectably large supply of XBRL-tagged financial data—we can take that “raw material” and refine it in ways financial analysts could only dream about a few years ago. So let’s look at what’s possible.
Sharper, deeper analysis: For example, let’s look at China, which is still a vibrant and growing market despite accelerating economic turmoil. A crucial issue for analysts evaluating risks and opportunities related to China is to understand both the magnitude of a company’s investment in China, and how it is changing over time. Now that companies tag their segment-level disclosures in XBRL, finding that answer becomes an instantaneous exercise.
Consider companies’ investment in property, plant and equipment (PP&E) in China for the years 2012-2014. We looked at over 20 U.S. companies with at least $250 million in PP&E in China for each of those years and took a deeper dive into them. Yes, the average company’s Chinese PP&E increased roughly 14 percent in that period—but largely because of Apple making large financial commitments to Chinese expansion. Exclude Apple from that sample, and the increase is only 4.6 percent.
What’s more, numerous storage device makers—Seagate, Western Digital, Micron, Sandisk—have all decreased their Chinese exposure by more than 20 percent. So have other materials and manufacturing players such as Alcoa or DuPont. Why? The answers are varied, and beyond the scope of our point here—but easy access to that level of detail can be invaluable to senior executives as they mull expansion plans or weigh strategic risks.
Better risk management: As another example, the rise of the U.S. dollar in global exchange markets was one of the biggest financial developments in 2015 (up roughly 8.4 percent against a basket of world currencies, according to Bloomberg). And now that the Federal Reserve has begun raising interest rates, currency exchange rates will continue to be a powerful force in corporate earnings in 2016. Everyone knows that big headline already.
XBRL gives financial analysts the power to understand how exchange rates might affect various sectors and companies more precisely. You can still take an “all filers” view of exchange rates and find that a stronger dollar is shaving a few cents off earnings per share at U.S. companies. But you can also easily sub-group those filers by industry, or even by individual company—and then discover that the 10 businesses suffering the largest losses in cash thanks to exchange rates are all pharmaceutical or health care firms. The average firm lost $0.04 per share on their cash position, and Johnson & Johnson suffered the most in 2015 with a pinch of $0.11 per share.
Empowering the analyst rather than the filer: The juicy details in any financial statement—from hidden opportunities you want to uncover, to questionable risks the filer would rather not be asked—are in the footnotes. Every analyst knows this. But most analysts are unwilling and/or unskilled enough to brave the ocean of text in individual, 40,000-word (yes!) SEC filings and painstakingly trace back numbers buried in footnotes to relevant line-items elsewhere on the financial statement.
A more efficient way to analyze, the one that XBRL-tagged data allows, is to surface all that information in an interactive platform. This allows an analyst to compare footnote data for hundreds of filings, across companies or over time, and to connect the nuggets of data tucked away in those footnotes to the larger messages the filer is disclosing elsewhere.
Now you can find the details on that debt number mentioned elsewhere and see when various notes will come due, or investigate exactly how operating income is changing in various business segments from year to year, or answer any number of other questions footnotes are famous for not answering easily.
The common thread for all these examples is that XBRL can let financial analysts get on with the business of analyzing—and the work of financial analysis is to probe deeper, to confirm points of data, to compare one number with another, to make connections. All of that can be done with traditional SEC financial filings and home-grown solutions already; you just need plenty of patience, Excel spreadsheets and tolerance for errors. Or we can move into a more, well, interactive way of handling data and get on with the business of analyzing our way to gain better insights and make better decisions.
Pranav Ghai and Alex Rapp are the co-founders of Calcbench, a financial data and research firm that relies on XBRL.