Analysis of Financial Statements Chapter 5 Feb 10, 2010
Learning Objectives <ul><li>How financial ratio analysis helps managers assess the firm’s health. </li></ul><ul><li>Comput...
Ratio Analysis <ul><li>Managers use  ratios  to interpret the raw numbers on financial statements. </li></ul><ul><li>Relat...
Ratio Analysis <ul><li>Profitability ratios </li></ul><ul><li>Liquidity ratios (cash) </li></ul><ul><li>Debt ratios (Solve...
Ratio Analysis <ul><li>Measure the overall effectiveness of the firm’s management in operating the business profitably. </...
Ratio Analysis How effective is the firm at generating revenue in excess of its cost of goods sold?  ROT says >40% Profita...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis How effective is the firm in keeping costs of operating expenses as well as production low?  How much profi...
Balance Sheet Excalibur Corporation Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inven...
Ratio Analysis How much net profit is being generated from each dollar of sales?  ROT says  > 10% Profitability Ratios Not...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625   Current Liabilities $23...
Ratio Analysis How effectively is the firm generating net income from its investment in assets ? How much income each doll...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis How well is the firm generating return to its equity providers; the common stockholders?  ROT says > 15% Ho...
Balance Sheet Excalibur Corporation Assets  Liabilities  Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Note...
Ratio Analysis <ul><li>Measure the ability of the firm to  meet its short-term financial obligations. </li></ul><ul><li>Fa...
Balance Sheet Excalibur Corporation Assets  Liabilities  Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Note...
Ratio Analysis <ul><li>Measure the ability of the firm to meet  its short-term financial obligations. </li></ul>Liquidity ...
Balance Sheet Excalibur Corporation Assets  Liabilities  Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Note...
Ratio Analysis <ul><li>Measure the relative size of the firm’s debt load and the firm’s ability to pay off the debt. </li>...
Ratio Analysis What proportion of the firm’s assets is financed with debt?  ROT says between 40% and 50% ok.  Higher than ...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis What is the proportion of debt relative to equity financing for the firm?  ROT says  < 1.0 Debt Ratios Debt...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis What is the firm’s ability to repay interest payments from its operating income?  ROT says > 7.0 x Debt Rat...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis <ul><li>Help assess how effectively the firm is using assets to generate sales. </li></ul><ul><li>Help asse...
Ratio Analysis Asset Activity Ratios How long does it take for the firm on average to collect its credit sales from custom...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis Is inventory being efficiently converted into cost of goods sold for the firm? How many times is the compan...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis How effective is the firm in using its  fixed  assets to help generate sales? How many dollars of sales is ...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Ratio Analysis How effective is the firm in using its overall assets to generate sales? How many dollars of sales are gene...
Assets  Liabilities  Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Curr...
Ratio Analysis How much are investors willing to pay per dollar of earnings of the firm?  ROT says PE ratio about 20 to 30...
Cash $175 Accounts Payable $115 Accounts Receivable 430  S-T Notes Payable   115 Inventories 625 Current Liabilities $230 ...
Industry Comparisons <ul><li>Comparing a ratio for one company with the same ratio for other companies in the same industr...
Ratio   Industry   Excalibur Profitability Gross Profit Margin  38%  39.7% Operating Profit Margin 20% 22.8% Net Profit Ma...
Ratio   Industry  Excalibur Liquidity Current Ratio  3.00x   5.35x Acid-Test Ratio  2.00x   2.63x Looking at the current r...
Ratio   Industry   Excalibur Debt Debt Ratio 35% 33% Times Interest Earned 7.00x 5.50x Debt to Equity  49%  48% While the ...
Ratio   Industry   Excalibur Asset Activity   Avg. Collection Period 60 days 108 days Inventory Turnover 3.00x 1.40x Fixed...
Ratio   Industry   Excalibur Market Value   Price Earnings  18.0   12.35  Excalibur’s Investors are not willing to  pay as...
Trend Analysis <ul><li>Comparing a ratio for one year with the same ratio for other years </li></ul><ul><li>Helps see whet...
Summary Analysis <ul><li>A complete ratio analysis of a company combines both trend analysis and industry comparisons. See...
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Chapter 05

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  1. 1. Analysis of Financial Statements Chapter 5 Feb 10, 2010
  2. 2. Learning Objectives <ul><li>How financial ratio analysis helps managers assess the firm’s health. </li></ul><ul><li>Compute profitability, liquidity, debt, asset activity, and market value ratios. </li></ul><ul><li>Compare financial information over time (trends) and among companies (benchmarking). </li></ul><ul><li>Look at sources of financial information </li></ul>
  3. 3. Ratio Analysis <ul><li>Managers use ratios to interpret the raw numbers on financial statements. </li></ul><ul><li>Relative measures allow comparison over time ( trends ), to other firms, and to benchmarks (Rule Of Thumb, ROT) </li></ul><ul><li>Ratios are used by financial managers, other business managers, creditors, investors and college students </li></ul>
  4. 4. Ratio Analysis <ul><li>Profitability ratios </li></ul><ul><li>Liquidity ratios (cash) </li></ul><ul><li>Debt ratios (Solvency) </li></ul><ul><li>Asset activity ratios </li></ul><ul><li>Market value ratios </li></ul>Five Categories of Ratios:
  5. 5. Ratio Analysis <ul><li>Measure the overall effectiveness of the firm’s management in operating the business profitably. </li></ul><ul><li>Measures how the firm’s returns (earnings) compare with its sales, asset investments and equity </li></ul>Profitability Ratios
  6. 6. Ratio Analysis How effective is the firm at generating revenue in excess of its cost of goods sold? ROT says >40% Profitability Ratios Gross Profit Margin = Gross Profit Sales
  7. 7. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Bonds $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Income Statement Excalibur Corporation Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Net Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 $575 $1,450 Gross Profit Margin = = 39.7% Gross Profit = Margin Gross Profit Sales
  8. 8. Ratio Analysis How effective is the firm in keeping costs of operating expenses as well as production low? How much profit am I earning just from the basic operations of my business. EBIT. ROT says 20% or better Profitability Ratios Operating Profit Margin = Operating Income Sales
  9. 9. Balance Sheet Excalibur Corporation Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $330 $1,450 Oper. Profit Margin = = 22.8% Operating Profit = Margin Operating Income Sales
  10. 10. Ratio Analysis How much net profit is being generated from each dollar of sales? ROT says > 10% Profitability Ratios Note: Net Income increases Retained Earnings. Dividends, either preferred or common, are paid out of retained earnings Net Profit Margin = Net Income Sales
  11. 11. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $162 $1,450 Net Profit Margin = = 11.2% Net Profit = Margin Net Income Sales
  12. 12. Ratio Analysis How effectively is the firm generating net income from its investment in assets ? How much income each dollar of assets produces. ROT says > 10% Profitability Ratios Return on Assets = Net Income Total Assets
  13. 13. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40) 108 Net Income $162 Income Statement Excalibur Corporation $162 $2,530 ROA = = 6.4% Return on Assets Net Income Total Assets =
  14. 14. Ratio Analysis How well is the firm generating return to its equity providers; the common stockholders? ROT says > 15% How many dollars of income for each dollar invested in the company by owners Profitability Ratios Return on Equity = Net Income Common Equity
  15. 15. Balance Sheet Excalibur Corporation Assets Liabilities Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $162 $1,700 ROE = = 9.53% Return on Equity = Net Income Common Equity
  16. 16. Ratio Analysis <ul><li>Measure the ability of the firm to meet its short-term financial obligations. </li></ul><ul><li>Failure to pay can lead to bankruptcy. </li></ul>Liquidity Ratios Are there sufficient current assets to pay off current liabilities? What is the cushion of safety? ROT says > 2 x Current Ratio = Current Assets Current Liabilities
  17. 17. Balance Sheet Excalibur Corporation Assets Liabilities Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Is this good? $1,230 $230 Current Ratio = = 5.35x Current Ratio = Current Assets Current Liabilities
  18. 18. Ratio Analysis <ul><li>Measure the ability of the firm to meet its short-term financial obligations. </li></ul>Liquidity Ratios What happens to the firm’s ability to repay current liabilities after what is usually the least liquid of the current assets (inventory) is subtracted? ROT says > 1.5 x Acid-Test Ratio = Current Assets - Inventory Current Liabilities
  19. 19. Balance Sheet Excalibur Corporation Assets Liabilities Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 $1,230 -$625 $230 Acid-Test Ratio = = 2.63x Acid-Test Ratio = Current Assets - Inventory Current Liabilities
  20. 20. Ratio Analysis <ul><li>Measure the relative size of the firm’s debt load and the firm’s ability to pay off the debt. </li></ul><ul><li>What percent of the firm’s assets are financed by debt? </li></ul><ul><li>The reciprocal is the percent of assets financed by equity. </li></ul>Debt Ratios - Solvency
  21. 21. Ratio Analysis What proportion of the firm’s assets is financed with debt? ROT says between 40% and 50% ok. Higher than 50% becomes more risky. Debt Ratios Debt Ratio = Total Debt Total Assets
  22. 22. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities $230 + $600 $2,530 Debt Ratio = = 33% Debt Ratio = Total Debt Total Assets
  23. 23. Ratio Analysis What is the proportion of debt relative to equity financing for the firm? ROT says < 1.0 Debt Ratios Debt to Equity Ratio Total Debt Common Equity =
  24. 24. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities $230 + $600 $1,700 D/E = = .49 Debt to Equity Ratio Total Debt Common Equity =
  25. 25. Ratio Analysis What is the firm’s ability to repay interest payments from its operating income? ROT says > 7.0 x Debt Ratios Times Interest Earned Ratio = Operating Income Interest Expense
  26. 26. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $330 $60 TIE Ratio = = 5.50x Times Interest = Earned Ratio Operating Income Interest Expense
  27. 27. Ratio Analysis <ul><li>Help assess how effectively the firm is using assets to generate sales. </li></ul><ul><li>Help assess how efficient the firm is in converting its current assets into cash </li></ul>Asset Activity Ratios
  28. 28. Ratio Analysis Asset Activity Ratios How long does it take for the firm on average to collect its credit sales from customers? ROT says 45 to 60 days. Average Collection Period = Accounts Receivable Avg. Daily Credit Sales
  29. 29. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Bonds $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $3.97 sales per day Additional Info: We assume all sales are credit sales. Average Collection = Period Accounts Receivable Avg. Daily Credit Sales $430 $1,450/365 ACP = = 108.3 days!
  30. 30. Ratio Analysis Is inventory being efficiently converted into cost of goods sold for the firm? How many times is the company turning its inventory over? ROT says 3 to 4 times Note: Use COGS not sales for this ratio! Asset Activity Ratios Inventory Turnover Ratio = COGS Inventory
  31. 31. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $875 $625 Inventory Turnover = = 1.4x Inventory Turnover = Ratio COGS Inventory
  32. 32. Ratio Analysis How effective is the firm in using its fixed assets to help generate sales? How many dollars of sales is generated for each dollar of investment in fixed assets? ROT says at least 1.50 x. Asset Activity Ratios Fixed Asset Turnover Ratio = Sales Net Fixed Assets
  33. 33. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Assets Liabilities Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $1,450 $1,300 Fixed Asset Turnover = = 1.12x Fixed Asset Turnover = Ratio Sales Net Fixed Assets
  34. 34. Ratio Analysis How effective is the firm in using its overall assets to generate sales? How many dollars of sales are generated by each dollar invested in total assets? ROT says 1.0 x. Asset Activity Ratios Total Asset Turnover Ratio = Sales Total Assets
  35. 35. Assets Liabilities Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Balance Sheet Excalibur Corporation Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation $1,450 $2,530 Total Asset Turnover = = 0.57x Total Asset Turnover = Ratio Sales Total Assets
  36. 36. Ratio Analysis How much are investors willing to pay per dollar of earnings of the firm? ROT says PE ratio about 20 to 30 x. (Indicator of investor’s attitudes toward future prospects of the firm and of the firm’s risk.) Market Value Ratios Price to Earnings Ratio = Market Price per Share Earnings per Share
  37. 37. Cash $175 Accounts Payable $115 Accounts Receivable 430 S-T Notes Payable 115 Inventories 625 Current Liabilities $230 Current Assets $1,230 Long-term Debt $600 Plant & Equipment $2,500 Owner’s Equity Less:Acc. Depr. (1,200) Common Stock $300 Net Fixed Assets $1,300 Capital in Excess of Par 600 Total Assets $2,530 Retained Earnings 800 Total Owners’ Equity $1,700 Total Liabilities and Owners Equity $2,530 Assets Liabilities Balance Sheet Excalibur Corporation Additional Info: 100 shares Out - standing Market Price $20.00 per share Sales $1,450 Cost of Goods Sold 875 Gross Profit $575 Operating Expenses 45 Depreciation 200 Operating Income $330 Interest Expense 60 Income Before Taxes $270 Taxes (40%) 108 Net Income $162 Income Statement Excalibur Corporation ( E arnings P er S hare = $162/100 = $1.62) $20.00 $162/100 P/E ratio = = 12.35x P/E Ratio Market Price/Share EPS =
  38. 38. Industry Comparisons <ul><li>Comparing a ratio for one company with the same ratio for other companies in the same industry </li></ul><ul><li>Benchmarking – allows you to put the value of a firm’s ratio in the context of its industry (vs. ROT) </li></ul>
  39. 39. Ratio Industry Excalibur Profitability Gross Profit Margin 38% 39.7% Operating Profit Margin 20% 22.8% Net Profit Margin 12% 11.2% Return on Assets 9.0% 6.4% Return on Equity 13.4% 9.5% Excalibur is good at keeping operating costs down, but not as good at total costs. ROA and ROE are low mainly due to productivity problems. They are not generating enough sales and have a large investment in accounts receivable and inventory.
  40. 40. Ratio Industry Excalibur Liquidity Current Ratio 3.00x 5.35x Acid-Test Ratio 2.00x 2.63x Looking at the current ratio it appears that Excalibur is way more liquid than the industry.... when looking at Acid Test (a better measure) they are still more liquid indicating that inventory and receivable levels are both probably too high. Summary of Excalibur Corporation Ratios
  41. 41. Ratio Industry Excalibur Debt Debt Ratio 35% 33% Times Interest Earned 7.00x 5.50x Debt to Equity 49% 48% While the debt ratio is close to the industry average, Excalibur is not able to cover interest payments as easily as the industry. This indicates Excalibur may have too much debt relative to what they can realistically afford, or paying very high interest rates.
  42. 42. Ratio Industry Excalibur Asset Activity Avg. Collection Period 60 days 108 days Inventory Turnover 3.00x 1.40x Fixed Asset Turnover 1.50x 1.12x Total Asset Turnover 0.75x .57x Collection policies need examining, as Excalibur is slower than average at collecting receivables. Inventories are being sold more slowly than the industry average, again indicating inventories that are too high. Excalibur is not efficient at converting Fixed Assets to Sales (fixed assets are not as productive as they should be). However, overall assets are not productive indicating Current Assets (e.g. inventories and receivables) are not as productive as the rest of the industry.
  43. 43. Ratio Industry Excalibur Market Value Price Earnings 18.0 12.35 Excalibur’s Investors are not willing to pay as much per dollar of earnings as they are for shares in other firms in the industry. This signals that they consider the firm’s prospects for earnings and growth to be worse than the average.
  44. 44. Trend Analysis <ul><li>Comparing a ratio for one year with the same ratio for other years </li></ul><ul><li>Helps see whether a company’s financial situation is improving or worsening. </li></ul><ul><li>See table 5-3 on page 119 (116) </li></ul>
  45. 45. Summary Analysis <ul><li>A complete ratio analysis of a company combines both trend analysis and industry comparisons. See Industry comparisons (pages 118 to 120). </li></ul><ul><li>Ratio analysis includes examining a company’s profitability, liquidity, debt management, asset activity and market value ratios </li></ul><ul><li>Sources of financial information appear on table 5-4, p.121 (118) </li></ul>
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