Your SlideShare is downloading. ×
0
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
* Copyright © 1999 by Harcourt Brace
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

* Copyright © 1999 by Harcourt Brace

377

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
377
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
9
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. 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
  • 2. Financial Statement Analysis Stockholders Creditors Management Will I be paid? How good is our investment? How are we performing?
  • 3. Limitations of Financial Statement Analysis <ul><li>Use of different accounting methods </li></ul><ul><li>Changes in accounting methods </li></ul>LIFO FIFO
  • 4. Limitations of Financial Statement Analysis <ul><li>Failure to understand trends or use industry ratios </li></ul><ul><li>Difficulty of making industry comparisons (i.e. conglomerates) </li></ul>????
  • 5. Limitations of Financial Statement Analysis <ul><li>Nonoperating items on income statement </li></ul><ul><li>Effects of inflation </li></ul>=
  • 6. Horizontal Analysis <ul><li>Net Sales </li></ul><ul><li>Earnings before factory closure </li></ul><ul><li>Net earnings </li></ul><ul><li>Increase (Decrease) </li></ul><ul><li>1996 1995 Dollars Percent </li></ul><ul><li>$1,836 $1,755 81 4.6% </li></ul><ul><li> 243 224 19 8.5% </li></ul><ul><li> 230 224 6 2.7% </li></ul>Wm. Wrigley Jr. Company (in millions)
  • 7. Trend Analysis <ul><li>Return on </li></ul><ul><li>Avg. Equity </li></ul><ul><li>1996 1995 1994 1993 1992 </li></ul><ul><li>27.2% 30.1% 36.5% 32.6% 29.4% </li></ul>Wm. Wrigley Jr. Company Tracking items over a series of years
  • 8. Vertical Analysis <ul><li>Common-size statements recast items as a percentage of a selected item </li></ul><ul><li>Allows comparisons of companies of different size </li></ul><ul><li>Compares percentages across years to identify trends </li></ul>% % %
  • 9. Common-Size Statements <ul><li>Sales revenue </li></ul><ul><li>Cost of goods sold </li></ul><ul><li>Gross profit </li></ul><ul><li>Selling & admin. exp. </li></ul><ul><li>Operating income </li></ul><ul><li>Interest expense </li></ul><ul><li>Income before tax </li></ul><ul><li>Income tax expense </li></ul><ul><li>Net income </li></ul>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%
  • 10. Analysis of Liquidity <ul><li>Nearness to cash </li></ul><ul><li>Ability to pay debts as they become due </li></ul>Cash Ratios Turnover Ratios Working Capital Ratios
  • 11. Working Capital <ul><li>Excess of current assets over current liabilities </li></ul><ul><li>Lacks meaningful comparisons for companies of different size </li></ul>-
  • 12. Current Ratio <ul><li>Measure of short-term financial health </li></ul><ul><li>Consider composition of current assets </li></ul>Rule of thumb 2:1
  • 13. Acid-Test (Quick) Ratio <ul><li>Stricter test of ability to pay debts </li></ul><ul><li>Excludes inventories and prepaid assets </li></ul>Quick Assets Current Liabilities
  • 14. Cash Flow from Operations to Current Liabilities <ul><li>Focuses on cash only </li></ul><ul><li>Covers period of time </li></ul>Net Cash Provided by Operating Activities Average Current Liabilities
  • 15. Accounts Receivable Turnover <ul><li>Net Credit Sales </li></ul><ul><li>Average Accounts Receivable </li></ul>Indicates how quickly a company is collecting (i.e. turning over) its receivables
  • 16. Accounts Receivable Turnover <ul><li>Too fast </li></ul><ul><li>credit policies too stringent; may be losing sales </li></ul><ul><li>Too slow </li></ul><ul><li>credit department not operating effectively; possible quality problems </li></ul>
  • 17. 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
  • 18. Days’ Sales in Receivables <ul><li>If this company’s credit terms are net 30, what would this tell you about the efficiency of the collection process? </li></ul>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
  • 19. Inventory Turnover Represents the number of times per period inventory is turned over (i.e. sold). Cost of Goods Sold Average Inventory
  • 20. Inventory Turnover <ul><li>Circuit City 4.3 times per year </li></ul><ul><li>Safeway 10.1 times per year </li></ul><ul><li>Can you compare the two ratios? </li></ul>
  • 21. # 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
  • 22. # of Days’ Sales in Inventory <ul><li>Circuit City 84 days </li></ul><ul><li>Safeway 36 days </li></ul><ul><li>Do these averages seem reasonable? </li></ul>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
  • 23. Cash Operating Cycle <ul><li>Time between purchase of merchandise and collection from the sale </li></ul># of days sales in receivables + # of days sales in inventory
  • 24. Analysis of Solvency <ul><li>Ability to stay in business over the long-term </li></ul>Debt-to-Equity Ratio Debt Service Coverage Times Interest Earned Cash Flow to Capital Expenditures
  • 25. Debt-to-Equity Ratio Total liabilities Total Stockholders’ Equity How much have creditors contributed compared to owners?
  • 26. Debt-to-Equity Ratio Total liabilities Total Stockholders’ Equity = .60 For every dollar contributed by owners, creditors have loaned $.60
  • 27. Times Interest Earned Ratio <ul><li>Measures ability to meet current interest payments </li></ul><ul><li>The greater the coverage the better </li></ul>Net Income + Interest Expense + Income Tax Expense Interest Expense
  • 28. Debt Service Coverage Ratio <ul><li>Measures amount of cash from operations available to service the debt </li></ul>Cash Flow from Operations before Interest & Taxes Interest and Principal Payments P + i
  • 29. Cash Flow from Operations to Capital Expenditures Ratio <ul><li>Measures company’s ability to use operations (vs. creditors and owners) to finance acquisitions of productive assets </li></ul>Cash Flow from Operations - Dividends Cash Paid for Capital Acquisitions
  • 30. Analysis of Profitability <ul><li>Rate of Return on Assets </li></ul><ul><li>Return on Common S/E </li></ul><ul><li>EPS </li></ul><ul><li>P/E Ratio </li></ul><ul><li>Dividend Ratios </li></ul>
  • 31. Rate of Return on Assets <ul><li>Measures return to all providers of capital (creditors and owners) </li></ul>Net Income + Interest Expense, net of tax Average Total Assets
  • 32. 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!
  • 33. Earnings per Share <ul><li>Presents profits on a per-share basis </li></ul>Net Income - Preferred Dividends Wtd. # of Common Shares Outstanding Certificate of Stock
  • 34. Price-Earnings Ratio <ul><li>Relates earnings to the market price of the stock </li></ul>Current Market Price Earnings per Share very high P/E very low P/E possibly overvalued possibly undervalued
  • 35. 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
  • 36. 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.
  • 37. Dividend Yield Ratio <ul><li>Investors willing to forgo dividends in lieu of price appreciation </li></ul>Common Dividends per Share Market Price per Share usually < 5% = Harcourt Brace & Company items and derived items:

×