Drexel University
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Drexel University






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Drexel University Drexel University Document Transcript

  • Drexel University Bennett S. LeBow College of Business Introduction to Finance Prof. Nelling WORKING WITH FINANCIAL STATEMENTS Standardized financial statements  Common-size (standardized) balance sheets Amt. Pct. Amt. Pct. Current assets 5 20 Current liab. 5 20 Fixed assets 20 80 Long-term debt 10 40 Equity 10 40 Total assets 25 100 Total liab. + O.E. 25 100  Common-size (standardized) income statements Amount Percent Sales $50,000 100 Cost of goods sold 35,000 70 Gross profit 15,000 30  Trend analysis  Industry comparisons Ratio analysis  How is it computed?  What is it intended to measure?  Could the computation of the ratio be improved?
  • Various financial ratios Liquidity ratios: Current assets Current ratio = Current liabilities Current assets - Inventory Quick ratio = Current liabilities Leverage ratios: Total liabilities Debt to equity = Equity Total liabilities Debt to total assets = Total Assets EBIT Times interest earned = Interest expense Activity ratios: Cost of goods sold Inventory turnover = Inventory 365 days Inventory period = Inventory turnover Sales Accounts receivable turnover = Accounts receivable 365 days Average collection period = Receivables turnover
  • COGS Accounts payable turnover = Accounts payable 365 days Average payables period = Payables turnover Sales Fixed asset turnover = Net property, plant, equipment Sales Total asset turnover = Total assets Profitability ratios: Net income Profit margin = Sales Net income Return on assets = Total assets Net income Return on equity = Equity Valuation ratios: Price per share Price-earnings ratio = Earnings per share Price per share Market-to-book ratio = Book value per share
  • The Dupont Identity  The DuPont Identity decomposes the ROE into its components to analyze the determinants of profitability.  Three-factor ROE decomposition: Net income Sales Assets Return on equity = X X Sales Assets Equity Return on equity = (profit margin) x (asset turnover) x (financial leverage)  Five-factor ROE decomposition: Net income Pretax Earnings EBIT Sales Assets Return on equity = X X X X Pretax Earnings EBIT Sales Assets Equity Return on equity = (tax burden) x (interest burden) x (margin) x (turnover) x (leverage)
  • Great Valley Hardware 2001 Income Statement ($000s) Sales 23368 Cost of goods sold 15562 Gross margin 7805 Operating expenses 6847 Depreciation 145 Earnings before interest & taxes 813 Interest 107 Earnings before taxes 706 Taxes 282 Net income 424 Great Valley Hardware 2001 Balance Sheet ($000s) Assets Cash 461 Accounts receivable 766 Inventory 5519 Current assets 6746 Net fixed assets 726 Total assets 7472 Liabilities and Equity Notes payable 380 Accounts payable 653 Accruals 958 Current liabilities 1991 Term loans 562 Common stock 950 Retained earnings 3969 Total stockholders’ equity 4919 Total Liabilities and Equity 7472
  • Hardware Stores Selected Ratios Great Industry Valley Average Current ratio ______ 2.1 Quick ratio ______ 0.5 Debt to total assets, % ______ 57 Times interest earned ______ 2.6 Average collection period, days ______ 18 Inventory turnover ______ 2.9 Return on equity, % ______ 11.9 Return on assets, % ______ 5.1 Total asset turnover ______ 3.0 Net profit margin, % ______ 1.7 Financial statement analysis exercise: • Compute the ratios in the table above for Great Valley, and compare them to those of other firms in their industry.
  • • For each of the three areas noted below, does Great Valley appear to be doing better or worse than other hardware stores? (i) liquidity ratios (ii) activity ratios (iii) profitability ratios • Use the three-factor DuPont Identity to examine why Great Valley's ROE differs from that of other hardware stores. Net income Sales Assets Return on equity = X X Sales Assets Equity Asset Financial ROE Profit margin turnover leverage Great ______ ______ ______ ______ Valley Hardware ______ ______ ______ ______ stores