Financial Statements
A Possible Framework for Analysis
Ratio Analysis
Trend Analysis
Common-Size and Index Analysis
Examples of External Uses of Statement
Analysis
Trade
Creditors -- Focus
on the liquidity of the firm.
Bondholders -- Focus
on the long-term cash flow of the
firm.
Shareholders -- Focus
on the profitability and long-term health of the firm.
Examples of Internal Uses of Statement
Analysis
Plan -- Focus
on assessing the current financial position and evaluating potential firm
opportunities.
Control -- Focus
on return on investment for various assets and asset efficiency.
Understand -- Focus
on understanding how suppliers of funds analyze the firm.
Primary Types of Financial Statements
Income Statement
A summary of a firm’s revenues and expenses over a specified period,
ending with net income or loss for the period.
Basket Wonders’ Balance Sheet (Asset Side)
a. How the firm stands on a specific date.
b. What BW owned.
c. Amounts owed by customers.
d. Future expense items already paid.
e. Cash/likely convertible to cash within 1
year.
f. Original amount paid.
g. Acc. deductions for wear and tear.
Cash and
C.E. $
90 Acct. Rec.c 394 Inventories 696 Prepaid Exp d 5
Accum Tax Prepay 10 Current Assetse $1,195 Fixed
Assets (@Cost)f 1030 Less: Acc. Depr. g (329) Net Fix.
Assets $ 701 Investment, LT 50 Other Assets, LT
223 Total Assets b
$2,169
Basket Wonders’ Balance Sheet (Liability
Side)
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.
f. Debts payable > 1 year.
g. Original investment.
h. Earnings reinvested.
Notes
Payable $ 290 Acct. Payablec 94 Accrued Taxes d 16
Other Accrued Liab. d 100 Current
Liab. e $
500 Long-Term Debt f 530 Shareholders’
Equity Com. Stock ($1 par) g 200 Add Pd in
Capital g 729 Retained Earnings h 210 Total
Equity $1,139
Total Liab/Equitya,b $2,169
Basket Wonders’ Income Statement
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.
e. Cost of borrowed funds.
f. Taxable income.
g. Amount earned for shareholders.
Net Sales
$ 2,211 Cost of Goods Sold b 1,599 Gross Profit
$
612 SG&A Expenses c 402 EBITd $ 210 Interest
Expense 59
EBT f $ 151 Income
Taxes 60 EATg
$ 91 Cash
Dividends 38
Increase
in RE $
53
Framework for Financial Analysis
Analytical
Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
Framework for Financial Analysis
Health of a Firm
Financial
Ratios
1.
Individually
2. Over
time
3. In
combination
4. In
comparison
Framework for Financial Analysis
Examples:
Volatility in sales
Volatility in costs
Proximity to break-even point
Framework for Financial Analysis
A Financial
Manager must
consider all three jointly when determining the financing
needs of the firm.
Framework for Financial Analysis
Use of Financial Ratios
Types of Comparisons
Internal
Comparisons
External
Comparisons
A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.
External Comparisons and Sources of
Industry Ratios
Examples:
Robert Morris Associates
Dun &
Bradstreet
Almanac of Business and
Industrial Financial Ratios
This
involves comparing the ratios of one firm with those of similar firms or
with industry averages.
Similarity is
important as one should compare “apples to apples.”
Liquidity Ratios
Current
Current
Assets
Current Liabilities
For Basket
Wonders December
31, 2003
Shows a
firm’s ability to cover its current liabilities with its current assets.
Liquidity Ratio Comparisons
BW Industry
2.39 2.15
2.26 2.09
1.91 2.01
Liquidity Ratios
Acid-Test (Quick)
Current
Assets - Inv
Current Liabilities
For Basket
Wonders December
31, 2003
Shows a
firm’s ability to meet current liabilities with its most liquid assets.
Liquidity Ratio Comparisons
BW Industry
1.00 1.25
1.04 1.23
1.11 1.25
Summary of the Liquidity Ratio Comparisons
Strong
current ratio and weak acid-test ratio indicates a potential problem in the
inventories account.
Note that
this industry has a relatively high level of inventories.
Ratio BW Industry
Current 2.39 2.15
Acid-Test 1.00 1.25
Current Ratio -- Trend Analysis Comparison
Acid-Test Ratio -- Trend Analysis
Comparison
Summary of the Liquidity Trend Analyses
The
current ratio for the industry has been rising slowly at the same time the acid-test ratio
has been relatively stable.
This
indicates that inventories are a significant problem for BW.
Financial Leverage Ratios
Debt-to-Equity
Total
Debt
Shareholders’ Equity
For Basket
Wonders December
31, 2003
Shows the
extent to which the firm is financed by debt.
Financial Leverage
Ratio Comparisons
Ratio Comparisons
BW Industry
.90 .90
.88 .90
.81 .89
Financial Leverage Ratios
Debt-to-Total-Assets
Total
Debt
Total Assets
For Basket
Wonders December
31, 2003
Shows the
percentage of the firm’s assets that are supported by debt financing.
Financial Leverage
Ratio Comparisons
Ratio Comparisons
BW Industry
.47 .47
.47
.47
.45 .47
Financial Leverage Ratios
Total
Capitalization
Total
Debt
Total Capitalization
For Basket
Wonders December
31, 2003
Shows the
relative importance of long-term debt to the long-term financing of the firm.
Financial Leverage
Ratio Comparisons
Ratio Comparisons
BW Industry
.62 .60
.62 .61
.67 .62
Coverage Ratios
Interest Coverage
EBIT
Interest Charges
For Basket
Wonders December
31, 2003
Indicates
a firm’s ability to cover interest charges.
Coverage
Ratio Comparisons
Ratio Comparisons
BW Industry
3.56 5.19
4.35 5.02
10.30 4.66
Coverage Ratio -- Trend Analysis Comparison
Summary of the Coverage Trend Analysis
This
indicates that low
earnings (EBIT) may
be a potential problem for BW.
Note, we
know that debt levels are in
line with the industry averages.
Activity Ratios
Receivable
Turnover
Annual
Net Credit Sales
Receivables
For Basket
Wonders December
31, 2003
Indicates
quality of receivables and how successful the firm is in its collections.
Activity Ratios
Avg Collection Period
Days in
the Year
Receivable Turnover
For Basket
Wonders December
31, 2003
Average
number of days that receivables are outstanding.
(or RT in
days)
Activity
Ratio Comparisons
Ratio Comparisons
BW Industry
65.0 65.7
71.1 66.3
83.6 69.2
Activity Ratios
Payable
Turnover (PT)
Annual
Credit Purchases
Accounts Payable
For Basket
Wonders December
31, 2003
Indicates
the promptness of payment to suppliers by the firm.
Activity Ratios
PT in Days
Days in
the Year
Payable Turnover
For Basket
Wonders December
31, 2003
Average
number of days that payables are outstanding.
Activity
Ratio Comparisons
Ratio Comparisons
BW Industry
22.1 46.7
25.4 51.1
43.5 48.5
Activity Ratios
Inventory Turnover
Cost of
Goods Sold
Inventory
For Basket
Wonders December
31, 2003
Indicates
the effectiveness of the inventory management practices of the firm.
Activity
Ratio Comparisons
Ratio Comparisons
BW Industry
2.30 3.45
2.44 3.76
2.64 3.69
Inventory Turnover Ratio --Trend Analysis
Comparison
Activity Ratios
Total Asset Turnover
Net Sales
Total Assets
For Basket
Wonders December
31, 2003
Indicates
the overall effectiveness of the firm in utilizing its assets to generate
sales.
Activity
Ratio Comparisons
Ratio Comparisons
BW Industry
1.02 1.17
1.03 1.14
1.01 1.13
Profitability Ratios
Gross Profit Margin
Gross
Profit
Net Sales
For Basket
Wonders December
31, 2003
Indicates
the efficiency of operations and firm pricing policies.
Profitability
Ratio Comparisons
Ratio Comparisons
BW Industry
27.7% 31.1%
28.7 30.8
31.3 27.6
Gross Profit Margin --
Trend Analysis Comparison
Trend Analysis Comparison
Profitability Ratios
Net Profit Margin
Net
Profit after Taxes
Net Sales
For Basket
Wonders December
31, 2003
Indicates
the firm’s profitability after taking account of all expenses and income taxes.
Profitability Ratio Comparisons
BW Industry
4.1% 8.2%
4.9 8.1
9.0 7.6
Net Profit Margin --
Trend Analysis Comparison
Trend Analysis Comparison
Profitability Ratios
Return on Investment
Net
Profit after Taxes
Total Assets
For Basket
Wonders December
31, 2003
Indicates
the profitability on the assets of the firm (after all expenses and taxes).
Profitability Ratio Comparisons
BW Industry
4.2% 9.8%
5.0 9.1
9.1 10.8
Return on Investment –
Trend Analysis Comparison
Trend Analysis Comparison
Profitability Ratios
Return on Equity
Net
Profit after Taxes
Shareholders’ Equity
For Basket
Wonders December
31, 2003
Indicates
the profitability to the shareholders of the firm (after all expenses and
taxes).
Profitability Ratio Comparisons
BW Industry
8.0% 17.9%
9.4 17.2
16.6 20.4
Return on Equity --
Trend Analysis Comparison
Trend Analysis Comparison
Return on Investment and the Du Pont
Approach
ROI2003 = .041 x 1.02 = .042 or 4.2%
ROIIndustry = .082 x 1.17 = .098 or 9.8%
Return on Equity and
the Du Pont Approach
the Du Pont Approach
ROE2003 = .041 x 1.02 x 1.90 = .080
ROEIndustry = .082 x 1.17 x 1.88 = .179
Summary of the Profitability Trend Analyses
The
profitability ratios for BW have ALL been falling since 2001.
Each has been below the industry averages for the past three years.
This
indicates that COGS and administrative costs may both
be too high and a potential problem for BW.
Note, this
result is consistent with the low interest coverage ratio.
Summary of Ratio Analyses
Inventories
are too high.
May be
paying off creditors (accounts payable) too soon.
COGS may
be too high.
Selling,
general, and administrative costs may be too high.
Common-size Analysis
An
analysis of percentage financial
statements where all balance sheet items are divided by total
assets and all
income statement items are divided by net sales or revenues.
No comments:
Post a Comment