Chapter 17 Financial Statement Analysis
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Chapter 17 Financial Statement Analysis

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Chapter 17 Financial Statement Analysis Chapter 17 Financial Statement Analysis Presentation Transcript

  • Chapter 17 Financial Statement Analysis
  • Topics Covered
    • Financial Ratios
    • DuPont System
    • Using Financial ratios
    • Measuring Company Performance
    • The Role of Financial Ratios
  • Ratio Analysis
    • Examines firm’s management of various facets of the company’s business through its financial statements.
    • Scales balance sheet and income statement information for easy comparison across time or to other companies.
  • Two common approaches
    • Trend Analysis - looks at changes in one company’s ratios over time.
    • Comparison or Industry Analysis - compares company’s ratios against a similar company or against industry-wide ratios.
    • We will look at both with Coca-Cola and Pepsi.
  • Areas Examined by Ratio Analysis
    • Leverage - measures the use of financial leverage (debt) and its impact
    • Liquidity - measures the ability to meet short-term obligations
    • Efficiency - measures the ability to contain the growth of assets, and the ability to effectly utilize assets
    • Profitability - measures the profitability of various segments of a company
  • Leverage Ratios
  • Leverage Ratios
  • Leverage Ratios calculation notes for Target & Wal-Mart
    • Given our Financial Statement (B/S and I/S) formatting from OneSource/Multitex:
      • Long-term debt = Total long-term debt from the B/S, which includes long-term borrowing and capital lease obligations.
      • Equity = Total Equity from B/S
      • EBIT = Operating income + Interest Expense from I/S
      • Depreciation expense was listed on Target’s I/S, but had to find Wal-Mart’s depreciation by the annual change in accumulated depreciation from B/S.
  • Target & Walmart’s Leverage Ratios 10.756 11.239 11.219 17.214 Cash coverage ratio 9.887 9.465 10.065 14.750 Times interest Earned 0.633 0.599 0.580 0.585 Total debt ratio 0.645 0.499 0.534 0.498 Debt-equity ratio 0.392 0.333 0.348 0.333 Long-term debt ratio 1999 2000 2001 2002 Walmart 8.099 8.026 7.947 7.612 Cash coverage ratio 5.926 5.819 5.666 5.551 Times interest Earned 0.658 0.666 0.675 0.670 Total debt ratio 0.771 0.864 1.029 1.079 Debt-equity ratio 0.435 0.464 0.507 0.519 Long-term debt ratio 1999 2000 2001 2002 Target
  • Best Leverage Management?
  • Liquidity Ratios
  • Liquidity Ratios
  • Liquidity Ratios calculation notes for Target & Wal-Mart
    • Given our Financial Statement (B/S and I/S) formatting from OneSource/Multitex:
      • Net working capital = total current assets – total current liabilities
      • Cash and marketable securities are in one account (cash and short-term investments)
  • Target & Walmart’s Liquidity Ratios 0.072 0.071 0.079 0.085 Cash ratio 0.124 0.132 0.153 0.149 Quick ratio 0.944 0.917 1.022 0.935 Current ratio -0.021 -0.031 0.007 -0.023 NWC to assets 1999 2000 2001 2002 Walmart 0.038 0.056 0.071 0.101 Cash ratio 0.352 0.365 0.614 0.840 Quick ratio 1.108 1.159 1.368 1.586 Current ratio 0.037 0.051 0.107 0.154 NWC to assets 1999 2000 2001 2002 Target
  • Best Liquidity Management?
  • Efficiency Ratios
  • Efficiency Ratios
  • Efficiency Ratios calculation notes for Target & Wal-Mart
    • Given our Financial Statement (B/S and I/S) formatting from OneSource/Multitex:
      • Sales = Total Revenue from I/S
      • Cost of Goods Sold = Cost of Revenue, Total from I/S
      • Average “whatever asset” = (beginning+ ending amounts from B/S)/2
      • Average Daily Sales or Cost of Goods Sold = Amount form I/S divided by 365
  • Target & Walmart’s Efficiency Ratios 51.893 50.084 46.865 45.193 Days' sales in inventories 7.034 7.288 7.788 8.077 Inventory turnover 2.690 2.938 3.130 3.041 Average collection period 2.772 2.601 2.718 2.767 Total asset turnover 1999 2000 2001 2002 Walmart 56.996 57.575 57.495 55.975 Days' sales in inventories 6.404 6.340 6.348 6.521 Inventory turnover 18.915 18.710 26.450 39.046 Average collection period 2.054 2.012 1.825 1.665 Total asset turnover 1999 2000 2001 2002 Target
  • Best Efficiency Management?
  • Profitability Ratios
  • Profitability Ratios
  • Profitability Ratios calculation notes for Target & Wal-Mart
    • Given our Financial Statement (B/S and I/S) formatting from OneSource/Multitex:
      • Dividend information listed below the I/S: Gross dividends = total annual dividends. Also can find EPS and Dividends per share here.
      • Earnings = Net Income from I/S
  • Target & Walmart’s Profitability Ratios 19.1% 18.3% 16.3% 18.0% Growth in equity from plowback 83.4% 83.0% 81.3% 83.5% Plowback ratio 16.6% 17.0% 18.7% 16.5% Payout ratio 22.9% 22.0% 20.1% 21.6% Return on equity 10.6% 10.1% 9.7% 10.1% Return on assets 3.8% 3.9% 3.6% 3.6% Operating profit margin 3.2% 3.3% 3.0% 3.3% Net profit margin 1999 2000 2001 2002 Walmart 17.0% 17.3% 16.2% 16.6% Growth in equity from plowback 83.3% 84.7% 85.2% 86.8% Plowback ratio 16.7% 15.3% 14.8% 13.2% Payout ratio 20.4% 20.4% 19.0% 19.1% Return on equity 9.4% 9.2% 8.4% 8.5% Return on assets 4.6% 4.6% 4.6% 5.1% Operating profit margin 3.4% 3.4% 3.4% 3.8% Net profit margin 1999 2000 2001 2002 Target
  • Best Profitability Management?
  • The DuPont System
    • A breakdown of ROE and ROA into component ratios
  • The DuPont System asset turnover Operating profit margin
  • The DuPont System leverage ratio asset turnover Operating profit margin debt burden
  • The DuPont System: Simplification of ROE
    • The last two terms of the 4-part DuPont equation for ROE, operating profit margin and debt burden, can be simplified to one term, net profit margin.
    • Net profit margin = Net Income/Sales
    • Also assets/equity can be written in terms of the total debt ratio.
  • Target vs. Walmart Du Pont System 22.9% 22.0% 20.1% 21.6% ROE 0.840 0.840 0.849 0.897 Debt burden 3.8% 3.9% 3.6% 3.6% Operating profit margin 2.772 2.601 2.718 2.767 Asset turnover 2.563 2.597 2.433 2.394 Leverage ratio 10.6% 10.1% 9.7% 10.1% ROA 3.8% 3.9% 3.6% 3.6% Operating profit margin 2.772 2.601 2.718 2.767 Asset turnover 1999 2000 2001 2002 Walmart 20.4% 20.4% 19.0% 19.1% ROE 0.744 0.748 0.743 0.738 Debt burden 4.6% 4.6% 4.6% 5.1% Operating profit margin 2.054 2.012 1.825 1.665 Asset turnover 2.930 2.959 3.035 3.049 Leverage ratio 9.4% 9.2% 8.4% 8.5% ROA 4.6% 4.6% 4.6% 5.1% Operating profit margin 2.054 2.012 1.825 1.665 Asset turnover 1999 2000 2001 2002 Target
  • Final Du Pont System comments
    • When a firm uses no debt financing, the leverage term = 1 and ROE = ROA.
    • Using more financial leverage will increase ROE when the return on new assets (investment) exceeds the interest rate on the new debt.
  • MVA & Economic Profit A gauge of how much value management added for the year. Depends upon managerial decisions and stock market forces. Market Value Added = The difference between the market value of common stock and its book value
  • MVA for Target and Wal-Mart 7.97 7.53 5.31 MV/BV 5.00 3.93 2.70 MV/BV 218,530 229,273 169,689 MVA 26,080 30,910 16,077 MVA 31343 35102 39337 Total BV Eq 6519 7860 9443 Total BV Eq 249,873 264,375 209,026 MV of Equity 32599 38770 25520 MV of Equity 4470 4453 4395 # of Shares 897.8 905.2 909.8 # of Shares 55.90 59.37 47.56 Stock Price 36.31 42.83 28.05 Stock Price 1999 2001 2002 Wal-Mart 2000 2001 2002 Target
  • Residual Income & EVA Economic Profit = capital invested multiplied by the spread between return on investment and the cost of capital. Residual Income or EVA = Net Dollar return after deducting the cost of capital
    • EVA is copyrighted by Stern-Stewart Consulting Firm and used with permission.
  • EVA for Target and Wal-Mart
    • From Stern-Stewart ( www.sternstewart.com ) EVA/MVA ranking in millions of dollars.
    • Target
      • 2002 EVA: 341 2002 MVA rank: 44
      • 1999 EVA: 710 1999 MVA rank: 92
    • Wal-Mart
      • 2002 EVA: 2,928 2002 MVA rank: 3
      • 1999 EVA: 2,233 1999 MVA rank: 6