MGMT 31000 Financial Management CHAPTER 3 Workin.docx

MGMT 31000
Financial Management
CHAPTER 3:
Working with Financial
Statements
Agenda
1. Cash Flow and Financial Statements: A
Closer Look
2. Ratio Analysis
financial ratios
3. The Du Pont Identity
Identity
MGMT 31000 - Financial
Management
2

Sources and Uses of Cash
Sources
1. Cash inflow – occurs when we “sell” something
2. Decrease in asset account
3. Increase in liability or equity account
Uses
1. Cash outflow – occurs when we “buy” something
2. Increase in asset account
3. Decrease in liability or equity account
-term debt
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Source vs. Use?
Source Use
Increase in accounts payable √
Increase in accounts receivable √
Decrease in notes payable √
Increase in retained earnings √
Increase in common stock √
Net fixed assets acquisitions √
Decrease in inventory √
Decrease in long-term debt √
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2. Ratio Analysis
lines from both the income statement and balance sheet
and to interpret this information in a meaningful way.
one time.
between companies
trying to measure and why that information is important
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Categories of Ratios
-term solvency or liquidity ratios
-run

-term solvency or financial leverage ratios
-term obligations
profit
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Categories of Financial Ratios
3-9
Short-term Solvency Ratios

y to pay current liabilities without
converting inventory to sales
hand
sLiabilitieCurrent
AssetsCurrent
sLiabilitieCurrent
Inventory)-Assets(Current
sLiabilitieCurrent
Cash
10 MGMT 31000 - Financial
Management
Long-term Solvency Ratios

-Equity Ratio: Use of debt and equity in capital structure
A company’s total assets per dollar of
equity
Total Debt
Total Debt Ratio 1
Total Assets
E
A
Total Debt
Debt-Equity Ratio
Total Equity
Total Assets
Equity Multiplier 1
Total Equity
D
E

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Long-term Solvency Ratios (cont’d)
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EBIT
Times Interest Earned Ratio
Interst Expenses
Turnover Ratios
times each year inventory is
turned.

being turned.
dollar of assets.
Assets Total
Sales
Inventory
Sold Goods ofCost
365 days
Days' Sales in Inventory
Inventory Turnover
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Turnover Ratios (cont’d)

s: How long it takes to collect on
credit sales.
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Sales
Receivables Turnover
Account Receivable
365 days
Days' Sales in Receivables
Receivables Turnover
Profitability Ratios
or every dollar in sales

equity.
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Assets Total
Income Net
Equity of ValueBook Total
Income Net
Net Income
Profit Margin
Sales
Market Value Ratios
share

-Earnings (P/E) Ratio: How much investors are willing
to
pay per dollar of current earnings.
-to-Book Ratio: Compare how investors value the
stock
to the financial statement value.
gOutstandin Shares #
IncomeNet
EPS
PriceShare
IncomeNet
tionCapitalizaM arket
Equity of ValueBook
Equity of ValueM arket
RatioBook -to-

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Market Value Ratios (cont’d)
Amortization.
operations (i.e. a rough measure of operating cash flows).
over the business (i.e. purchase all of the equity and repay the
debt).
-EBITDA ratio
EV Market Value of Equity Book Value of Liabilities -
EV
Enterprise Value - EBITDA Ratio =
EBITDA

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Exercise..
-15.3)/48.0=0.87
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Global’s 2012 B/S (Excerpted)
Current Assets Current liabilities
Cash 21.2 Accounts payable 29.2
Accounts Receivable 18.5 Notes payable/short-term debt 3.5
Inventories 15.3 Current maturities of long-term debt 13.3
Other Current Assets 2.0 Other current liabilities 2.0
Total Current Assets 57.0 Total current liabilities 48.0

Exercise…
(177.7-22.2)/177.7
=0.88
-Equity Ratio =
(3.5+13.3+99.9)
/22.2 = 5.26
177.7/22.2= 8.00
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Assets 2009 Liabilities and Stockholders' Equity 2009
Current Assets Current liabilities
Cash 21.2 Accounts payable 29.2
Accounts Receivable 18.5 Notes payable/short-term debt 3.5
Inventories 15.3 Current maturities of long-term debt 13.3
Other Current Assets 2.0 Other current liabilities 2.0
Total Current Assets 57.0 Total current liabilities 48.0

Long-Term Assets Long-Term Liabilities
Land 22.2 Long-term debt 99.9
Buildings 36.5 Capital lease obligations 0.0
Equipment 39.7 Total debt 99.9
Less Accumulated Depreciation (18.7) Deferred taxes 7.6
Net Property, plant, and equipment 79.7 Other long-term
liabilities 0.0
Goodwill and intangible assets 20.0 Total long-term liabilities
107.5
Other Long-term assets 21.0 Total Liabilities 155.5
Total long-term assets 120.7 Stockhoders' Equity 22.2
Total assets 177.7 Total Liabilities and Stockholders' Equity
177.7
Global’s 2012 B/S
Exercise…
10.4/7.7= 1.35

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2009
Total Sales 186.7
Cost of Sales (153.4)
Gross Profit 33.3
Selling, general, and administrative expense (13.5)
Research and development (8.2)
Depreciation and amortization (1.2)
Operating Income 10.4
Other income 0.0
Earnings before interest and taxes (EBIT) 10.4
Interest income (expense) (7.7)
Pretax income 2.7
Taxes (0.7)
Net Income 2.0
Global’s 2012 I/S

Exercises..
=186.7/177.7=1.05
=153.4/15.3=10.03
365/10.03 =36.40
186.7/18.5=10.09
365/10.09=36.17
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Assets 2009
Current Assets
Cash 21.2
Accounts Receivable 18.5
Inventories 15.3
Other Current Assets 2.0

Total Current Assets 57.0
Long-Term Assets
Total long-term assets 120.7
Total assets 177.7
2009
Total Sales 186.7
Gross Profit 33.3
Global’s 2009 I/S (Excerpted)
Global’s 2012 B/S (Excerpted)
Exercises..
Amortization = 10.4+1.2=11.6

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Global’s 2012 I/S (Excerpted)
2009
Total Sales 186.7
Gross Profit 33.3
SG&A (13.5)
Research and development (8.2)
Depreciation and amortization (1.2)
Operating Income 10.4
Other income 0.0
Earnings before interest and taxes (EBIT) 10.4
Interest income (expense) (7.7)
Pretax income 2.7
Taxes (0.7)
Net Income 2.0
• Book Assets = 177.7
• Book Equity = 22.2

3. The Du Pont Identity
ROE = NI / TE
ROE = (NI / Sales) (Sales / TA) (TA / TE)
ROE = PM * TAT * EM
e of the firm’s
operating efficiency
asset use efficiency
financial leverage
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Using the Du Pont Identity
XYZ Corporation has the following financial information for

the previous year:
A) = $6M
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Using the Du Pont Identity
Compute the ROE using the DuPont Analysis.
1. Total assets = CA + FA = $2M + $6M = $8M
2. TAT = Sales / TA = $8M / $8M = 1
3. NWC = CA – CL CL = CA – NWC = $2M - $1M = $1M
4. Total liabs. = CL + LTD = $1M + $3M = $4M
5. Total equity = total assets – total liabs. = $8M - $4M = $4M

6. EM = assets / equity = $8M / $4M = 2
7. ROE = PM x TAT x EM = 8% x 1 x 2 = 16%
8. Without DuPont, ROE = NI / TE = PM * Sales / TE = 8% x
$8M /
4M = 16%
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Potential Problems
1. There is no underlying theory, so there is no way to
know which ratios are most relevant
2. Benchmarking is difficult for diversified firms
3. Globalization and international competition makes
comparison more difficult because of differences in
accounting regulations
4. Varying accounting procedures, i.e. FIFO vs. LIFO
5. Different fiscal years
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Example: Determinants of ROE
-Mart Stores and
Target had the following accounting measures:
sset turnover, equity
multiplier, and ROE during this period.
-Mart’s asset turnover in
2012, what would its ROE have been?
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(in $ billion) Wal-Mart Target
Sales 403.9 65.3
Net Income 13.7 2.6
Total Assets 167.8 47.0

Book Equity 65.5 13.6
Example: (cont’d)
Solution
:
ROE
than Wal-Mart.
-Mart’s asset turnover,
its
ROE would have been 3.98%× 2.41× 3.46=33.2%

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Wal-Mart Target
Net profit margin 13.7/403.9=3.39% 2.6/65.3=3.98%
Asset turnover 403.9/167.8=2.41 65.3/47.0=1.39
Equity multiplier 167.8/65.5=2.56 47.0/13.6=3.46
ROE 13.7/65.5=20.91% 2.6/13.6=19.1%
Example: Computing EV

-to-book ratio of 7.99
ebt-equity ratio of 3.7
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Example: (cont’d)

MGMT 31000 Financial Management CHAPTER 3 Workin.docx

MGMT 31000 Financial Management CHAPTER 3 Workin.docx

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