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Financial Statement AnalysisRatio Analysis ExamplePrufrock Cor.docx
- 1. Financial Statement Analysis Ratio Analysis Example Prufrock Corporation Balance Sheet as of December 31,2008 ($ in millions) Assets Liabilities and Owners' Equity Current assets Current liabilities Cash $98 Accounts payable $344 Accounts receivable $188 Notes payable $196 Inventory $422
- 2. Total $540 Total $708 Long-term debt $457 Fixed assets Owners' equity Net plant and equipment $2,880 Common stock and paid-in surplus $550 Total assets $3,588 Retained earnings $2,041 Total $2,591
- 3. Total liabilities and owners' equity $3,588 Prufrock Corporation 2008 Income Statement ($ in millions) Sales 2311 Cost of goods sold 1344 Depreciation 276 Earnings before interest and taxes 691 Interest paid 141 Taxable income 550 Taxes (34%) 187 Net income 363 Dividends 121
- 4. Addition to retained earnings 242 *Create common size balance sheet and common size income statement. *Calculate ratios for Prufrock Corporation Short-term solvency or liquidity ratios Liquidity ratio measures the firm’s ability to pay its bills over the short run without undue stress. Current ratio= *Do we have enough short-term liquid assets to cover our short- term debts? Quick ratio (acid test ratio) = *Do we have enough really liquid short-term assets to cover our short-term debts? Long-term solvency, or financial leverage, ratios Leverage ratio measures the form’s long-run ability to meet its obligations. Total debt ratio= What percentage of total assets is financed with either short- or long-term debt? Debt-equity ratio=
- 5. Times interest earned= * It measures how well a company has its interest obligations covered. Are we generating enough income to make out interest payments? Asset management or turnover ratios Turnover ratios measure asset use efficiency. Inventory turnover= *On average, how many times per year do we go through our inventory? (Excess inventory is expensive!) Day’s sales Outstanding= Fixed Assets Turnover Ratio= Total Assets Turnover Ratio= Profitability ratios Operating margin= Profit margin= Return on assets (ROA) = *What is profit per dollar of asset?
- 6. Return on equity (ROE) = *What is the rate of return for stockholders? Return on equity (ROE) = Profit margin * Total asset turnover * Equity multiplier Market value ratios (We assume that Prufrock has 33 million shares outstanding and stock sold for $88 per share at the end of the year.) EPS= Price-earnings ratio= Market-to-book ratio= 4-1 Running head: FULL TITLE OF YOUR PAPER IN CAPS ON ONE LINE1 ABBREVIATED TITLE OF YOUR PAPER 2
- 7. Team Paper: Sources of and solutions to conflict in a virtual environment PJM6210 Communication Skills for Project Managers Month, day, year Sources of Conflict in a Virtual Environment Interpersonal Conflict � Jones In the second paragraph, begin addressing your first topic or question. This should directly align to what you stated you were going to talk about in the first sentence of the introduction. When citing sources, be sure to follow APA 6th edition. Example: As an educator and a practitioner within the project management profession, the importance of transformation that is occurring in the workplace, specifically the adoption of digital strategies and technology is becoming increasingly relevant (Sundararajan, 2017). Intergroup Conflict � David Please follow the same pattern as above. Check Week 2 material Solution s to Conflict in a Virtual Environment � James Please follow the same pattern as above. This link might help you :) https://www.onpointconsultingllc.com/blog/managing-conflict- in-virtual-teams-5-key-tips
- 8. Be 8 - 10 pages, not including title page � should write FULL 3 pages each Cite a minimum of 6 peer reviewed sources � should add at least 2 peer review Due date for Draft � Monday midnight ♡ Due date for Final � Tuesday References It is critical that you know, understand, and apply the knowledge that APA requires that EACH reference cited in the text or body of your paper MUST appear in the reference list. Chapter seven in the APA manual gives you reference examples. Everything is double-spaced and there is a hanging indent. You will need to use the APA Publication Manual to ensure that your reference list is correct. This information may be different than what you remember from your undergraduate days. Each reference cited in the text or body of your paper must appear in the reference list and each entry in the reference list must appear in the text. Example references are below: Project Management Institute. (2017). A guide to the project management body of knowledge (PMBOK guide). Newtown Square, PA, USA: Project Management Institute. Project Management Institute. (n.d.). Global conference overview. Retrieved from https://www.pmi.org/global-
- 9. conference. Project Management institute. (2018). PMI global conference champions of change. Retrieved from https://www.eiseverywhere.com/eSites/2018globalconference/H omepage. Sundararajan, A. (2017). The future of work. Finance & Development, Vol. 54, No. 2 Thiry, M. (2013). The future of project management in a digitised economy. Paper presented at PMI® Global Congress 2013—EMEA, Istanbul, Turkey. Newtown Square, PA: Project Management Institute. Week 2-3: Team Paper Overview and Rationale: Through our lectures and reading this week, we have focused on some key topics--team building and development, consensus and collaboration, leadership styles, conflict resolution--related to leadership, applying those topics to the virtual environment. Although we have treated these as somewhat separate topics, in action they must be integrated together when execution in the
- 10. context of a virtual team. For this assignment, your team will be writing a research paper exploring a topic related to the material presented this week. Course Outcome Connection: Demonstrate an understanding of key topics related to leading remote teams, such as team building and development, leadership styles, conflict resolution, building consensus, and fostering collaboration Assignment Instructions: Write an 8 - 10 page paper addressing one of the topics listed below: Strategies for team development in a virtual environment Sources of and solutions to conflict in a virtual environment Near vs. far leadership strategies (how might leadership strategies or approaches differ in an onsite vs. remote setting) Building trust in a virtual workplace Keeping team members accountable on a virtual project If your team has a strong desire to write on a slightly different topic related to the topics covered this week, please let me know, and I will consider it for approval. Papers that show strong and reflective consideration of these issues will be more
- 11. likely to earn a higher grade. Assignment Format & Requirements: This assignment should meet the following requirements: Include a title page Be 8 - 10 pages, not including title page Cite a minimum of 6 peer reviewed sources Be double-spaced Use Times New Roman 12 point font Have 1" margins on all sides Include page numbers Make appropriate use of section and topic headers to organize paper Team member responsible for submitting the assignment should submit it using this assignment link and using the Team Plagiarism Report Link below. This is a total of two submission. Please let me know if you have questions about this. Note: Failing to meet any of these items will automatically remove the possibility of earning an 'A' on this assignment. Meeting them does not guarantee an 'A', but makes it possible. Please see Grading Notes below for a further explanation.
- 12. *Failing to cite the use of outside materials appropriately will result in a loss of credit on the assignment (including a possible failing grade in the course) and a charge filed with the University for Academic Dishonesty. Grading Notes: When grading this assignment, I will be looking at the completeness of the assignment by verifying that you have covered all the required areas. I will also be focusing on how well you succinctly cover the key items mentioned above. I will also be making certain that you meet all the formatting guidelines and requirements, such as six peer reviewed sources and others. Although following the formatting guidelines will not guarantee an ‘A’ on the assignment, if you do not meet the guidelines, you will not earn an ‘A’, regardless of the quality of the specific content you submit. An ‘A’ will be assigned to those submissions that do not merely meet the basic assignment guidelines, but are exceptionally well written and executed. Please make sure that a team member is responsible for performing a quality audit on this paper. Do this by not simply proofreading the document, but ensuring that it meets all of the guidelines outlined above.
- 13. Ch. 4: Financial Statement Analysis
- 14. 1 Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know the limitations of ratio analysis Objectives
- 15. Financial Statement Analysis Involves Benchmark (peer)Analysis: Comparing firm’s performance with others in the same industry Trend Analysis: Evaluating trends in the firm’s financial position over-time
- 16. 3 3 Financial Statement Analysis Tools 1. Standardized statements Common size balance sheet Divide by total assets Common size income statement Divide by sales 2. Ratios
- 17. 4 4 - Differences in size create problems (time-series and cross- sectional) - Currency -We standardize by using percentages - Ratios: problem--> people compute and use differently – how computed, intended measure, unit, high/low values, improved? - What can the company do to affect ratios and how might this affect other ratios?
- 18. Common Size Balance Sheet 5 5 - Differences in size create problems (time-series and cross- sectional) - Currency -We standardize by using percentages
- 19. - Ratios: problem--> people compute and use differently – how computed, intended measure, unit, high/low values, improved? - What can the company do to affect ratios and how might this affect other ratios? Common Size Income Statement 6 6
- 20. Ratios also allow for better comparison through time or between companies As we look at each ratio, ask yourself: How is the ratio computed? What is the ratio trying to measure and why? What is the unit of measurement? What does the value indicate? How can we improve the company’s ratio? Ratio Analysis
- 21. 7 Ratio Categories Short-term solvency or liquidity ratios Long-term solvency, or financial leverage ratios (capital structure ratios) Asset management or turnover ratios Profitability ratios Market value ratios
- 22. 8 8 Liquidity ratios- firms ability to pay bills over the short run Long-term solvency – financial leverage Asset management (turnover) ratios – how efficient is firms use of assets to generate sales Profit- how efficient does firm use assets to generate profits Market value ratios – use market price of stock Not just computing ratios… trying to make better decisions! Liquidity Ratios
- 23. 9 9 First…liquidity (house selling for $1) Current ratio: usually think higher the better (current assets and liabilities should be converted to cash within next year) - could mean inefficient use of cash - long term things have an effect (long term debt increases current cash) - liquid assets generally less profitable - think back to WSJ article Quick ratio: inventory usually least liquid current asset and quality may not be known
- 24. Suppose CR stays the same and QR goes down - Not increasing current assets…if liabilities come due could be an issue – Large levels of inventory have accumulated (should look into inventory) Inventory turnover ratio measures how many times the company turns over its inventory during the year. Days’ Sales Outstanding Asset Management Ratio
- 25. Fixed Asset Turnover Ratio measures how effectively the firm uses its plant and equipment. Total Asset Turnover Ratio represents the amount of sales generated per dollar invested in the firm’s assets. Asset Management Ratio
- 26. Debt ratio measures the proportion of the firm’s assets that were financed using current plus long-term liabilities. Times Interest Earned Ratio measures the ability of the firm to service its debt or repay the interest on debt. Capital Structure Ratios
- 27. Debt/Equity ratio is calculated by dividing Total Debt by Total Equity. Equity Multiplier
- 29. Profit Margin measures operating income, or EBIT, per dollar of sales Basic Earning Power (BEP) Ratio indicates the ability of the firm’s assets to generate operating income. Profitability Ratios
- 30. Return on Total Assets (ROA) Return on Equity (ROE) Profitability Ratios
- 31. Price/Earning Ratio(P/E) shows how much investors are willing to pay per dollar of earning Market to Book Ratio (M/B) Market Value Ratios
- 32. DuPont Equation ROE = NI / TE Multiply by 1 and then rearrange: ROE = (NI / TE) (TA / TA) ROE = (NI / TA) (TA / TE) = ROA * EM
- 33. Multiply by 1 again and then rearrange: ROE = (NI / TA) (TA / TE) (Sales / Sales) ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM = Profit Margin * Total Asset Turnover * Equity Multiplier 17 17 Popularized by Du Pont Corporation
- 34. ROE is affected by 3 things: 1) operating efficiency (profit margin) 2) asset use efficiency (total asset turnover) 3) financial leverage (equity multiplier) DuPont Identity ROE = PM * TAT * EM Profit margin Operating efficiency How well it controls costs Total asset turnover Asset use efficiency How well it manages its assets. Equity multiplier Financial leverage
- 35. 18 18 Benchmark Trend Analysis Peer Group Comparisons Standard Industrial Classification (SIC) Codes North American Industry Classification System (NAICS)
- 36. 19 19 Sample ratios: Molson Coors From Reuters Management Effectiveness Company IndustrySector S&P 500 Return on Assets (TTM) 3.89 1.13 1.19 6.89 Return on Assets - 5 Yr. Avg. 3.66 3.87 4.13 8.12 Return on Investment (TTM) 4.35 1.45 1.76 9.65 Return on Investment - 5 Yr. Avg. 4.40 5.74 6.06 11.00 Return on Equity (TTM) 6.61 2.16 3.65 20.90 Return on Equity - 5 Yr. Avg. 7.30 8.22 8.88 19.96 From Hoovers Profitability Company Industry Market
- 37. Gross Profit Margin 40.50% 54.88% 28.77% Pre-Tax Profit Margin 10.79% 18.51% 8.48% Net Profit Margin 8.13% 12.51% 5.53% Return on Equity 5.9% 16.7% 10.1% Return on Assets 3.3% 6.5% 1.5% Ret on Invested Capital4.5% 9.1% 4.4% 20 20
- 38. Potential Problems with Ratio Analysis No underlying theory No way to know which ratios are most relevant Benchmarking is difficult Especially for diversified firms Globalization and international competition makes comparison more difficult Differences in accounting regulations Firms use varying accounting procedures Firms have different fiscal years Extraordinary, or one-time, events Mixed signals Relies on historical data
- 39. 21 21 Conglomerates Trump case: Marvin Roffman sued when he questions Trump Taj Majal (1990) New issues: Internet and information s liabilitie Current assets Current Ratio Current = s Liabilitie Current Inventory
- 40. - Asset Current Ratio (Quick) Test - Acid = = Cost of Goods Sold Inventory Turnover Inventories Sales/365 Annual s Receivable day per
- 42. Fixed Net Sales Ratio Turnover Assets Fixed = = Total Liabilities Debt Ratio Total Assets = Times Interest Net Operating Income or EBIT EarnedInterest Expense TE TD Ratio Equity
- 45. = share per Book value share per price Market M/B = Ch. 3 - Financial Statements
- 46. 1 The Annual Report Balance sheet – provides a snapshot of a firm’s financial position at one point in time. Income statement – summarizes a firm’s revenues and expenses over a given period of time. Statement of cash flows – reports the impact of a firm’s
- 47. activities on cash flows over a given period of time. Statement of stockholders’ equity – shows how much of the firm’s earnings were retained, rather than paid out as dividends. How presentation will benefit audience: Adult learners are more interested in a subject if they know how or why it is important to them. Presenter’s level of expertise in the subject: Briefly state your credentials in this area, or explain why participants should listen to you. 2
- 48. Balance Sheet What are the resources of the company? What are the company’s existing obligations? What are the company’s net assets? Lesson descriptions should be brief. 3
- 49. Balance Sheet Summary of the financial position of a company at a particular date Assets: cash, accounts receivable, inventory, land, buildings, equipment and intangible items Liabilities: accounts payable, notes payable and mortgages payable Owners’ Equity: net assets after all obligations have been satisfied
- 50. Lesson descriptions should be brief. 4 Accounting Equation Assets = Liabilities + Owners’ Equity Sources of Funding Creditors’ claims against resources = + Owners’ claims against resources Resources Resources to use to generate revenues
- 51. Example objectives At the end of this lesson, you will be able to: Save files to the team Web server. Move files to different locations on the team Web server. Share files on the team Web server. 5
- 52. Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents Assets Liabilities (Debt) & Equity Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock
- 53. Common Stock (Par value) Paid in Capital Retained Earnings
- 54. Shows the results of a company’s operations over a period of time. What goods were sold or services performed that provided revenue for the company? What costs were incurred in normal operations to generate these revenues? What are the earnings or company profit? Income Statement
- 55. Income Statement SALES - EXPENSES = PROFIT Revenue
- 56. Income Statement SALES - EXPENSES = PROFIT Cost of Goods Sold Operating Expenses (marketing, administrative) Financing Costs (Interest Expense) Taxes
- 57. Income Statement SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME
- 58. - Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses
- 59. OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME - Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS Operating Activities
- 60. SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME - Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS Financing Activities
- 61. Statement of Cash Flows Reports the amount of cash collected and paid out by a company in operating, investing and financing activities for a period of time. How did the company receive cash? How did the company use its cash? Complementary to the income statement.
- 62. 14 Statement of Cash Flows Cash inflows Sell goods or services Sell other assets or by borrowing Receive cash from investments by owners Cash outflows Pay operating expenses Expand operations, repay loans Pay owners a return on investment
- 63. 15 Match Classification of Cash Flows Operating activities – Transactions and events that enter into the determination of net income. Investing activities – Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans. Financing activities – Transactions and events whereby resources and obtained from, or repaid to, owners and creditors.
- 64. 16 Operating Activities Cash Inflow Sale of goods or services Sale of investments in trading securities Interest revenue Dividend revenue Cash Outflow Inventory payments Interest payments Wages Utilities, rent
- 65. Taxes 17 14
- 66. Investing Activities Cash Inflow Sale of plant assets Sale of securities, other than trading securities Collection of principal on loans Cash Outflow Purchase of plant assets Purchase of securities, other than trading securities Making of loans to other entities 18
- 67. 16 Financing Activities Cash Inflow Issuance of own stock Borrowing Cash Outflow Dividend payments Repaying principal on borrowing Treasury stock purchase
- 70. 20 Statement of Stockholder’s Equity Beginning retained earnings +Net income –Dividends paid =Ending retained earnings
- 71. An additional financial statement that identifies changes in a firm’s equity from one accounting period to the next.