* Copyright © 1999 by Harcourt Brace
Upcoming SlideShare
Loading in...5
×
 

* Copyright © 1999 by Harcourt Brace

on

  • 569 views

 

Statistics

Views

Total Views
569
Views on SlideShare
569
Embed Views
0

Actions

Likes
0
Downloads
8
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

* Copyright © 1999 by Harcourt Brace * Copyright © 1999 by Harcourt Brace Presentation Transcript

  • Chapter 13 Financial Statement Analysis No part of this product may be reproduced, transmitted, or used in any form or by any means except as provided in the Harcourt Brace & Company end-use license agreement found in a readme file attached to this work. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, FL 32887. Portions of this work were published in previous editions. Produced in the United States of America. 0-03-021353-3
  • Financial Statement Analysis Stockholders Creditors Management Will I be paid? How good is our investment? How are we performing?
  • Limitations of Financial Statement Analysis
    • Use of different accounting methods
    • Changes in accounting methods
    LIFO FIFO
  • Limitations of Financial Statement Analysis
    • Failure to understand trends or use industry ratios
    • Difficulty of making industry comparisons (i.e. conglomerates)
    ????
  • Limitations of Financial Statement Analysis
    • Nonoperating items on income statement
    • Effects of inflation
    =
  • Horizontal Analysis
    • Net Sales
    • Earnings before factory closure
    • Net earnings
    • Increase (Decrease)
    • 1996 1995 Dollars Percent
    • $1,836 $1,755 81 4.6%
    • 243 224 19 8.5%
    • 230 224 6 2.7%
    Wm. Wrigley Jr. Company (in millions)
  • Trend Analysis
    • Return on
    • Avg. Equity
    • 1996 1995 1994 1993 1992
    • 27.2% 30.1% 36.5% 32.6% 29.4%
    Wm. Wrigley Jr. Company Tracking items over a series of years
  • Vertical Analysis
    • Common-size statements recast items as a percentage of a selected item
    • Allows comparisons of companies of different size
    • Compares percentages across years to identify trends
    % % %
  • Common-Size Statements
    • Sales revenue
    • Cost of goods sold
    • Gross profit
    • Selling & admin. exp.
    • Operating income
    • Interest expense
    • Income before tax
    • Income tax expense
    • Net income
    Dollars % $60,000 100% 24,000 40 36,000 60 6,000 10 30,000 50 3,000 5 27,000 45 10,000 17 $ 17,000 28%
  • Analysis of Liquidity
    • Nearness to cash
    • Ability to pay debts as they become due
    Cash Ratios Turnover Ratios Working Capital Ratios
  • Working Capital
    • Excess of current assets over current liabilities
    • Lacks meaningful comparisons for companies of different size
    -
  • Current Ratio
    • Measure of short-term financial health
    • Consider composition of current assets
    Rule of thumb 2:1
  • Acid-Test (Quick) Ratio
    • Stricter test of ability to pay debts
    • Excludes inventories and prepaid assets
    Quick Assets Current Liabilities
  • Cash Flow from Operations to Current Liabilities
    • Focuses on cash only
    • Covers period of time
    Net Cash Provided by Operating Activities Average Current Liabilities
  • Accounts Receivable Turnover
    • Net Credit Sales
    • Average Accounts Receivable
    Indicates how quickly a company is collecting (i.e. turning over) its receivables
  • Accounts Receivable Turnover
    • Too fast
    • credit policies too stringent; may be losing sales
    • Too slow
    • credit department not operating effectively; possible quality problems
  • Days’ Sales in Receivables Represents the average # of days accounts are outstanding 365 Days Accts. Receivable Turnover 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
  • Days’ Sales in Receivables
    • If this company’s credit terms are net 30, what would this tell you about the efficiency of the collection process?
    365 Days 5.6 Times = 65 days Example: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
  • Inventory Turnover Represents the number of times per period inventory is turned over (i.e. sold). Cost of Goods Sold Average Inventory
  • Inventory Turnover
    • Circuit City 4.3 times per year
    • Safeway 10.1 times per year
    • Can you compare the two ratios?
  • # of Days’ Sales in Inventory Represents the average # of days inventory is on hand before its sold # of Days in Period Inventory Turnover Ratio 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
  • # of Days’ Sales in Inventory
    • Circuit City 84 days
    • Safeway 36 days
    • Do these averages seem reasonable?
    1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
  • Cash Operating Cycle
    • Time between purchase of merchandise and collection from the sale
    # of days sales in receivables + # of days sales in inventory
  • Analysis of Solvency
    • Ability to stay in business over the long-term
    Debt-to-Equity Ratio Debt Service Coverage Times Interest Earned Cash Flow to Capital Expenditures
  • Debt-to-Equity Ratio Total liabilities Total Stockholders’ Equity How much have creditors contributed compared to owners?
  • Debt-to-Equity Ratio Total liabilities Total Stockholders’ Equity = .60 For every dollar contributed by owners, creditors have loaned $.60
  • Times Interest Earned Ratio
    • Measures ability to meet current interest payments
    • The greater the coverage the better
    Net Income + Interest Expense + Income Tax Expense Interest Expense
  • Debt Service Coverage Ratio
    • Measures amount of cash from operations available to service the debt
    Cash Flow from Operations before Interest & Taxes Interest and Principal Payments P + i
  • Cash Flow from Operations to Capital Expenditures Ratio
    • Measures company’s ability to use operations (vs. creditors and owners) to finance acquisitions of productive assets
    Cash Flow from Operations - Dividends Cash Paid for Capital Acquisitions
  • Analysis of Profitability
    • Rate of Return on Assets
    • Return on Common S/E
    • EPS
    • P/E Ratio
    • Dividend Ratios
  • Rate of Return on Assets
    • Measures return to all providers of capital (creditors and owners)
    Net Income + Interest Expense, net of tax Average Total Assets
  • Return on Common Stockholders’ Equity Net Income - Preferred Dividends Average Common Stockholders’ Equity The owners earned 15% on their investment in ABC Co... Not bad!
  • Earnings per Share
    • Presents profits on a per-share basis
    Net Income - Preferred Dividends Wtd. # of Common Shares Outstanding Certificate of Stock
  • Price-Earnings Ratio
    • Relates earnings to the market price of the stock
    Current Market Price Earnings per Share very high P/E very low P/E possibly overvalued possibly undervalued
  • Price-Earnings Ratio Both companies have earnings of $2 per share. So why the different P-E ratios? P-E Ratios Co. A = 6 to 1 Co. B = 8 to 1
  • Dividend Payout Ratio Common Dividends per Share Earnings per Share We need to decide what % of the firm’s income we can return to owners.
  • Dividend Yield Ratio
    • Investors willing to forgo dividends in lieu of price appreciation
    Common Dividends per Share Market Price per Share usually < 5% = Harcourt Brace & Company items and derived items: