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Transcript

  • 1. Financial Ratios
  • 2. Ratio Analysis
    • Measure firm performance
    • Compare over time
    • Compare with other firms or industries
    • Analyze ROE
    • Project financial statements into future
  • 3. Ratios
    • Profitability
    • Activity or Utilization
    • Liquidity
    • Leverage
    • Growth
    • Valuation
  • 4.
    • 1. Profit Margin (PM) =
    • 2. Operating Profit Margin
    • (not in the book) =
    • 3. Return on Assets
    • (ROA) =
    • 4. Return on Equity
    • (ROE) =
    Profitability Ratios
  • 5. Liquidity Ratios
    • Current Ratio =
    • Quick Ratio =
    • Cash Ratio =
  • 6. Activity or Utilization Ratios
    • Receivables Turnover =
    • Average Collection Period =
    • Inventory Turnover* =
    • Fixed Asset Turnover =
    • Total Asset Turnover =
    * Sometimes =
  • 7. Leverage Ratios
    • Debt Ratio (DR) =
    • Long-term Debt Ratio* =
    • Time Interest Earned (XIE) =
    • Cash Coverage =
    • Fixed Charge Coverage (not in the book) =
    • Debt to Equity =
    • Equity Multiplier (EM) =
    • *Also called Debt to Capital Ratio
  • 8. Growth Rates
    • 1. Percentage growth of Sales, Net Income, etc.
    • Example:
    • 2. Sustainable Growth = ROBE(1-PO)
    • where PO is the payout ratio = Div/NI
  • 9. Sustainable Growth
    • Growth financed through:
      • Internal equity funds
      • Supportable debt
    • Such that:
      • Firm’s debt ratio is held constant
    • SG
    • (Grant’s approx.)
    • (Book’s formula)
    • Where b is the “plowback” or retention ratio
  • 10. Valuation Ratios
    • Price Earnings (PE) =
    • Market to Book =
  • 11. P/E Ratio 5x 10x P/E $25 $50 Price Low High Growth $5 $5 EPS B A
  • 12. Price-earnings Ratios for Selected U.S. Companies Coca-Cola . . . . . Beverages 13 17 20 25 34 53 27 Disney . . . . . . Entertainment 25 20 19 26 23 38 23 Liz Claiborne . . . Clothing 13 19 11 19 17 29 13 McDonald’s . . . . Restaurants 10 16 18 20 24 28 22 NationsBank . . . Banking 7 10 9 10 10 21 Phelps Dodge . . . Copper 6 8 4 17 7 23 35 Southwest Air . . . Airlines 20 14 15 38 21 21 27 Texas Utilities . . . Public Utilities 6 7 8 15 14 14 Wal-Mart . . . . . Retail 26 28 24 39 18 38 25 Standard & Poor’s . . . (500 Stock Index) 11 14 15 22 17 25 20 Jan. Jan. Jan. Jan. Jan. June July Corporation Industry 1983 1986 1990 1993 1996 1998 2004
  • 13. Comparison of Market Value to Book Value per Share 8.33 28.11 Yahoo, Inc. 57.98 56.13 Colgate-Palmolive 7.01 10.33 Oracle Corp 3.77 32.11 Pfizer 1.78 36.58 Monsanto 1.71 13.57 Steelcase, Inc. .74 11.01 Wolverine Tube - 46.02 Amazon, Inc. 4.64 $ 27.95 Microsoft Ratio of Market Value to Book Value July 2004 Market Value per Share Corporation
  • 14. Du Pont Analysis
    • ROE =
    • ROE =
    • =
    • 3. ROE =
    Profit Margin * Total Asset Turnover * Equity Multiplier (PM) (TAT) (EQ)
  • 15. Sustainable Growth and Du Pont Sales Asset Asset Equity PAT Sales 1 - PO
  • 16. Microsoft Income Statements (in millions)
  • 17. Microsoft Balance Sheet (in millions)
  • 18. Wal-Mart Stores Income Statement (in thousands)
  • 19. Wal-Mart Stores Balance Sheet (in thousands)
  • 20. Wal-Mart Stores Balance Sheet (cont.) (in thousands)
  • 21. Du Pont Examples Microsoft ROE = 24.6% * 0.867 * 1.21 = 25.7% Wal-Mart ROE = 3.5% * 2.547 * 2.46 = 21.8%
  • 22. How Are They Doing Now? Microsoft Wal-Mart
  • 23. Things to Consider Concerning Financial Ratios
    • What aspect of the firm or its operations are
    • we attempting to analyze?
          • Generally, the aspects are “fuzzy”, e.g., utilization
    • What goes into a particular ratio?
          • Historical cost? Market values? What accounting conventions?
    • What is the unit of measurement?
          • Dollars? Days? Turns?
    • What would a desirable ratio value be?
          • Always?
  • 24. Income Statement for the Year 2004 Discrepancies 1. Revenue recognition (i.e., installment sales and leases) 2. Cost of goods sold (i.e., may use LIFO during inflation) 3. Extraordinary losses
  • 25. Trends in Annual Reports
    • Interactive On-line Reports http:// www.intel.com/intel/finance
    • Plain Speaking http://www.berkshirehathaway.com/2003ar/2003ar.pdf
    • Filings, i.e. 10k annual reports http://www.edgar-online.com/bin/esearch/fullsearch.asp