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This document provides an overview of financial statement analysis. It defines key financial statements like the income statement and balance sheet. It also explains the purpose of financial ratio analysis and identifies common ratios used to evaluate a firm's liquidity, financial leverage, coverage, activity, and profitability. Examples are provided to demonstrate calculating and comparing ratios for a company called Basket Wonders to industry averages. Trend analyses are also shown to identify areas where the company's performance differs from its industry over time.

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1 Chapter 6Chapter 6 Financial StatementFinancial Statement AnalysisAnalysis © Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI
2 After studying Chapter 6,After studying Chapter 6, you should be able to:you should be able to: Understand the purpose of basic financial statements and their contents. Explain why financial statement analysis is important to the firm and to outside suppliers of capital. Define, calculate, and categorize (according to liquidity, financial leverage, coverage, activity, and profitability) the major financial ratios and understand what they can tell us about the firm. Define, calculate, and discuss a firm’s operating cycle and cash cycle. Use ratios to analyze a firm's health and then recommend reasonable alternative courses of action to improve the health of the firm. Analyze a firm’s return on investment (i.e., “earning power”) and return on equity using a DuPont approach. Understand the limitations of financial ratio analysis. Use trend analysis, common-size analysis, and index analysis to gain additional insights into a firm's performance.
3 FinancialFinancial Statement AnalysisStatement Analysis Financial Statements A Possible Framework for Analysis Balance Sheet Ratios Income Statement and Income Statement/Balance Sheet Ratios Trend Analysis Common-Size and Index Analysis
4 Examples of External UsesExamples of External Uses of Statement Analysisof Statement Analysis Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm. BondholdersBondholders -- Focus on the long-term cash flow of the firm. ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
5 Examples of Internal UsesExamples of Internal Uses of Statement Analysisof Statement Analysis PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities. ControlControl -- Focus on return on investment for various assets and asset efficiency. UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
6 Primary Types ofPrimary Types of Financial StatementsFinancial Statements Income StatementIncome Statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance SheetBalance Sheet A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
7 Basket Wonders’ BalanceBasket Wonders’ Balance Sheet (Asset Side)Sheet (Asset Side) a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. Cash and C.E. $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Expdd 5 Accum Tax Prepay 10 Current AssetsCurrent Assetsee $1,195$1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329) Net Fix. AssetsNet Fix. Assets $ 701$ 701 Investment, LT 50 Other Assets, LT 223 b Basket Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a
8 Basket Wonders’ BalanceBasket Wonders’ Balance Sheet (Liability Side)Sheet (Liability Side) a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested. Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxesdd 16 Other Accrued Liab.dd 100 Current Liab.Current Liab.ee $$ 500500 Long-Term Debtff 530 Shareholders’ Equity Com. Stock ($1 par)gg 200 Add Pd in Capitalgg 729 Retained Earningshh 210 TotalTotal EquityEquity $$1,1391,139 a,b Basket Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
9 Basket Wonders’Basket Wonders’ Income StatementIncome Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. Net Sales $ 2,211 Cost of Goods Soldbb 1,599 Gross Profit $ 612 SG&A Expensescc 402 EBITd $ 210 Interest Expensee 59 EBTff $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53$ 53 Basket Wonders Statement of Earnings (in thousands)Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007for Year Ending December 31, 2007a
10 Framework forFramework for Financial AnalysisFinancial Analysis Analytical Tools UsedAnalytical Tools Used Sources and Uses Statement Statement of Cash Flows Cash Budgets 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. Trend / Seasonal ComponentTrend / Seasonal Component How much funding will be required in the future? Is there a seasonal component?
11 Framework forFramework for Financial AnalysisFinancial Analysis Health of a Firm Financial Ratios 1. Individually 2. Over time 3. In combination 4. In comparison 1. Analysis of the funds needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
12 Framework forFramework for Financial AnalysisFinancial Analysis ExamplesExamples:: Volatility in sales Volatility in costs Proximity to break-even point 1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm. Business riskBusiness risk relates to the risk inherent in the operations of the firm.
13 Framework forFramework for Financial AnalysisFinancial Analysis A Financial Manager must consider all three jointly when determining the financing needs of the firm. DeterminingDetermining thethe financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
14 Framework forFramework for Financial AnalysisFinancial Analysis NegotiationsNegotiations withwith suppliers ofsuppliers of capital.capital. DeterminingDetermining thethe financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
15 Use of Financial RatiosUse of Financial Ratios Types ofTypes of ComparisonsComparisons InternalInternal ComparisonsComparisons ExternalExternal ComparisonsComparisons A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.
16 External Comparisons andExternal Comparisons and Sources of Industry RatiosSources of Industry Ratios Examples: Risk ManagementRisk Management AssociationAssociation Dun & BradstreetDun & Bradstreet Almanac ofAlmanac of Business andBusiness and IndustrialIndustrial Financial RatiosFinancial Ratios This involves comparing the ratios of one firm with those of similarsimilar firms or with industry averages. SimilaritySimilarity is important as one should compare “apples to apples.”
17 Liquidity RatiosLiquidity Ratios CurrentCurrent Current AssetsCurrent Assets Current LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to cover its current liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios $1,195$1,195 $500$500 = 2.392.39
18 Liquidity RatioLiquidity Ratio ComparisonsComparisons BW Industry 2.39 2.15 2.26 2.09 1.91 2.01 Year 2007 2006 2005 CurrentCurrent RatioRatio Ratio is stronger than the industry average.
19 Liquidity RatiosLiquidity Ratios Acid-Test (Quick)Acid-Test (Quick) Current Assets - InvCurrent Assets - Inv Current LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to meet current liabilities with its most liquid assets. Balance Sheet Ratios Liquidity Ratios $1,195 - $696$1,195 - $696 $500$500 = 1.001.00
20 Liquidity RatioLiquidity Ratio ComparisonsComparisons BW Industry 1.00 1.25 1.04 1.23 1.11 1.25 Year 2007 2006 2005 Acid-Test RatioAcid-Test Ratio Ratio is weaker than the industry average.
21 Summary of the LiquiditySummary of the Liquidity Ratio ComparisonsRatio Comparisons Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. RatioRatio BWBW IndustryIndustry Current 2.39 2.15 Acid-Test 1.00 1.25
22 Current Ratio -- TrendCurrent Ratio -- Trend Analysis ComparisonAnalysis Comparison Trend Analysis of Current Ratio 1.5 1.7 1.9 2.1 2.3 2.5 2005 2006 2007 Analysis Year RatioValue BW Industry
23 Acid-Test Ratio -- TrendAcid-Test Ratio -- Trend Analysis ComparisonAnalysis Comparison Trend Analysis of Acid-Test Ratio 0.5 0.8 1.0 1.3 1.5 2005 2006 2007 Analysis Year RatioValue BW Industry
24 Summary of the LiquiditySummary of the Liquidity Trend AnalysesTrend Analyses The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable. This indicates that inventoriesinventories are a significant problem for BWBW. The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
25 Financial Leverage RatiosFinancial Leverage Ratios Debt-to-EquityDebt-to-Equity Total DebtTotal Debt Shareholders’ EquityShareholders’ Equity For Basket Wonders December 31, 2007 Shows the extent to which the firm is financed by debt. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $1,139$1,139 = .90.90
26 Financial LeverageFinancial Leverage Ratio ComparisonsRatio Comparisons BW Industry .90 .90 .88 .90 .81 .89 Year 2007 2006 2005 Debt-to-Equity RatioDebt-to-Equity Ratio BW has average debt utilization relative to the industry average.
27 Financial Leverage RatiosFinancial Leverage Ratios Debt-to-Total-AssetsDebt-to-Total-Assets Total DebtTotal Debt Total AssetsTotal Assets For Basket Wonders December 31, 2007Shows the percentage of the firm’s assets that are supported by debt financing. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $2,169$2,169 = .47.47
28 Financial LeverageFinancial Leverage Ratio ComparisonsRatio Comparisons BW Industry .47 .47 .47 .47 .45 .47 Year 2007 2006 2005 Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio BW has average debt utilization relative to the industry average.
29 Financial Leverage RatiosFinancial Leverage Ratios Total CapitalizationTotal Capitalization Long-term DebtLong-term Debt Total CapitalizationTotal Capitalization For Basket Wonders December 31, 2007 Shows the relative importance of long-term debt to the long-term financing of the firm. Balance Sheet Ratios Financial Leverage Ratios $530$530 $1,669$1,669 = .32.32 (i.e., LT-Debt + Equity)
30 Financial LeverageFinancial Leverage Ratio ComparisonsRatio Comparisons BW Industry .32 .30 .32 .31 .37 .32 Year 2007 2006 2005 Total Capitalization RatioTotal Capitalization Ratio BW has average long-term debt utilization relative to the industry average.
31 Coverage RatiosCoverage Ratios Interest CoverageInterest Coverage EBITEBIT Interest ChargesInterest Charges For Basket Wonders December 31, 2007Indicates a firm’s ability to cover interest charges. Income Statement Ratios Coverage Ratios $210$210 $59$59 = 3.563.56
32 CoverageCoverage Ratio ComparisonsRatio Comparisons BW Industry 3.56 5.19 4.35 5.02 10.30 4.66 Year 2007 2006 2005 Interest Coverage RatioInterest Coverage Ratio BW has below average interest coverage relative to the industry average.
33 Coverage Ratio -- TrendCoverage Ratio -- Trend Analysis ComparisonAnalysis Comparison Trend Analysis of Interest Coverage Ratio 3.0 5.0 7.0 9.0 11.0 2005 2006 2007 Analysis Year RatioValue BW Industry
34 Summary of the CoverageSummary of the Coverage Trend AnalysisTrend Analysis This indicates that low earningslow earnings (EBIT) may be a potential problem for BWBW. Note, we know that debt levelsdebt levels are in line with the industryindustry averages. The interest coverage ratio for BWBW has been falling since 2005. It has been below industryindustry averages for the past two years.
35 Activity RatiosActivity Ratios Receivable TurnoverReceivable Turnover Annual Net Credit SalesAnnual Net Credit Sales ReceivablesReceivables For Basket Wonders December 31, 2007Indicates quality of receivables and how successful the firm is in its collections. Income Statement / Balance Sheet Ratios Activity Ratios $2,211$2,211 $394$394 = 5.615.61 (Assume all sales are credit sales.)
36 Activity RatiosActivity Ratios Avg Collection PeriodAvg Collection Period Days in the YearDays in the Year Receivable TurnoverReceivable Turnover For Basket Wonders December 31, 2007 Average number of days that receivables are outstanding. (or RT in days) Income Statement / Balance Sheet Ratios Activity Ratios 365365 5.615.61 = 65 days65 days
37 ActivityActivity Ratio ComparisonsRatio Comparisons BW Industry 65.0 65.7 71.1 66.3 83.6 69.2 Year 2007 2006 2005 Average Collection PeriodAverage Collection Period BW has improved the average collection period to that of the industry average.
38 Activity RatiosActivity Ratios Payable Turnover (PT)Payable Turnover (PT) Annual Credit PurchasesAnnual Credit Purchases Accounts PayableAccounts Payable For Basket Wonders December 31, 2007 Indicates the promptness of payment to suppliers by the firm. Income Statement / Balance Sheet Ratios Activity Ratios $1551$1551 $94$94 = 16.516.5 (Assume annual credit purchases = $1,551.)
39 Activity RatiosActivity Ratios PT in DaysPT in Days Days in the YearDays in the Year Payable TurnoverPayable Turnover For Basket Wonders December 31, 2007 Average number of days that payables are outstanding. Income Statement / Balance Sheet Ratios Activity Ratios 365365 16.516.5 = 22.1 days22.1 days
40 ActivityActivity Ratio ComparisonsRatio Comparisons BW Industry 22.1 46.7 25.4 51.1 43.5 48.5 Year 2007 2006 2005 Payable Turnover in DaysPayable Turnover in Days BW has improved the PT in Days. Is this good?Is this good?
41 Activity RatiosActivity Ratios Inventory TurnoverInventory Turnover Cost of Goods SoldCost of Goods Sold InventoryInventory For Basket Wonders December 31, 2007 Indicates the effectiveness of the inventory management practices of the firm. Income Statement / Balance Sheet Ratios Activity Ratios $1,599$1,599 $696$696 = 2.302.30
42 ActivityActivity Ratio ComparisonsRatio Comparisons BW Industry 2.30 3.45 2.44 3.76 2.64 3.69 Year 2007 2006 2005 Inventory Turnover RatioInventory Turnover Ratio BW has a very poor inventory turnover ratio.
43 Inventory Turnover RatioInventory Turnover Ratio --Trend Analysis--Trend Analysis ComparisonComparison Trend Analysis of Inventory Turnover Ratio 2.0 2.5 3.0 3.5 4.0 2005 2006 2007 Analysis Year RatioValue BW Industry
44 Activity RatiosActivity Ratios Total Asset TurnoverTotal Asset Turnover Net SalesNet Sales Total AssetsTotal Assets For Basket Wonders December 31, 2007 Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement / Balance Sheet Ratios Activity Ratios $2,211$2,211 $2,169$2,169 = 1.021.02
45 ActivityActivity Ratio ComparisonsRatio Comparisons BW Industry 1.02 1.17 1.03 1.14 1.01 1.13 Year 2007 2006 2005 Total Asset Turnover RatioTotal Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak?Why is this ratio considered weak?
46 Profitability RatiosProfitability Ratios Gross Profit MarginGross Profit Margin Gross ProfitGross Profit Net SalesNet Sales For Basket Wonders December 31, 2007 Indicates the efficiency of operations and firm pricing policies. Income Statement / Balance Sheet Ratios Profitability Ratios $612$612 $2,211$2,211 = .277277
47 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BW Industry 27.7% 31.1% 28.7 30.8 31.3 27.6 Year 2007 2006 2005 Gross Profit MarginGross Profit Margin BW has a weak Gross Profit Margin.
48 Gross Profit Margin --Gross Profit Margin -- Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Gross Profit Margin 25.0 27.5 30.0 32.5 35.0 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
49 Profitability RatiosProfitability Ratios Net Profit MarginNet Profit Margin Net Profit after TaxesNet Profit after Taxes Net SalesNet Sales For Basket Wonders December 31, 2007 Indicates the firm’s profitability after taking account of all expenses and income taxes. Income Statement / Balance Sheet Ratios Profitability Ratios $91$91 $2,211$2,211 = .041.041
50 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BW Industry 4.1% 8.2% 4.9 8.1 9.0 7.6 Year 2007 2006 2005 Net Profit MarginNet Profit Margin BW has a poor Net Profit Margin.
51 Net Profit Margin --Net Profit Margin -- Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Net Profit Margin 4 5 6 7 8 9 10 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
52 Profitability RatiosProfitability Ratios Return on InvestmentReturn on Investment Net Profit after TaxesNet Profit after Taxes Total AssetsTotal Assets For Basket Wonders December 31, 2007Indicates the profitability on the assets of the firm (after all expenses and taxes). Income Statement / Balance Sheet Ratios Profitability Ratios $91$91 $2,160$2,160 = .042.042
53 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BW Industry 4.2% 9.8% 5.0 9.1 9.1 10.8 Year 2007 2006 2005 Return on InvestmentReturn on Investment BW has a poor Return on Investment.
54 Return on Investment –Return on Investment – Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Return on Investment 4 6 8 10 12 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
55 Profitability RatiosProfitability Ratios Return on EquityReturn on Equity Net Profit after TaxesNet Profit after Taxes Shareholders’ EquityShareholders’ Equity For Basket Wonders December 31, 2007Indicates the profitability to the shareholders of the firm (after all expenses and taxes). Income Statement / Balance Sheet Ratios Profitability Ratios $91$91 $1,139$1,139 = .08.08
56 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BW Industry 8.0% 17.9% 9.4 17.2 16.6 20.4 Year 2007 2006 2005 Return on EquityReturn on Equity BW has a poor Return on Equity.
57 Return on Equity --Return on Equity -- Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Return on Equity 7.0 10.5 14.0 17.5 21.0 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
58 Return on Investment andReturn on Investment and the Du Pont Approachthe Du Pont Approach ROIROI2007 = .041 x 1.02 = .042.042 or 4.2%4.2% ROIROIIndustry = .082 x 1.17 = .098.098 or 9.8%9.8% ROIROI = Net profit margin X Total asset turnover Earning PowerEarning Power = Sales profitability X Asset efficiency
59 Return on Equity andReturn on Equity and the Du Pont Approachthe Du Pont Approach ROEROE2007 = .041 x 1.02 x 1.90 = .080.080 ROEROEIndustry = .082 x 1.17 x 1.88 = .179179 Return On EquityReturn On Equity = Net profit margin X Total asset turnover X Equity Multiplier Equity MultiplierEquity Multiplier = Total Assets Shareholders’ Equity
60 Summary of the ProfitabilitySummary of the Profitability Trend AnalysesTrend Analyses The profitability ratios for BWBW have ALL been falling since 2005. Each has been below the industryindustry averages for the past three years. This indicates that COGSCOGS and administrative costsadministrative costs may both be too high and a potential problem for BWBW. Note, this result is consistent with the low interest coverage ratio.
61 Summary of Ratio AnalysesSummary of Ratio Analyses Inventories are too high. May be paying off creditors (accounts payable) too soon. COGS may be too high. Selling, general, and administrative costs may be too high.
62 Common-size AnalysisCommon-size Analysis An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues.
63 Basket Wonders’ CommonBasket Wonders’ Common Size Balance SheetsSize Balance Sheets Regular (thousands of $) Common-Size (%) Assets 2005 2006 2007 2005 2006 2007 Cash 148 100 90 12.10 4.89 4.15 AR 283 410 394 23.14 20.06 18.17 Inv 322 616 696 26.33 30.14 32.09 Other CA 10 14 15 0.82 0.68 0.69 Tot CA 763 1,140 1,195 62.39 55.77 55.09 Net FA 349 631 701 28.54 30.87 32.32 LT Inv 0 50 50 0.00 2.45 2.31 Other LT 111 223 223 9.08 10.91 10.28 Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0
64 Basket Wonders’ CommonBasket Wonders’ Common Size Balance SheetsSize Balance Sheets Regular (thousands of $) Common-Size (%) Liab+Equity 2005 2006 2007 2005 2006 2007 Note Pay 290 295 290 23.71 14.43 13.37 Acct Pay 81 94 94 6.62 4.60 4.33 Accr Tax 13 16 16 1.06 0.78 0.74 Other Accr 15 100 100 1.23 4.89 4.61 Tot CL 399 505 500 32.62 24.71 23.05 LT Debt 150 453 530 12.26 22.16 24.44 Equity 674 1,086 1,139 55.11 53.13 52.51 Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0
65 Basket Wonders’ CommonBasket Wonders’ Common Size Income StatementsSize Income Statements Regular (thousands of $) Common-Size (%) 2005 2006 2007 2005 2006 2007 Net Sales 1,235 2,106 2,211 100.0 100.0 100.0 COGS 849 1,501 1,599 68.7 71.3 72.3 Gross Profit 386 605 612 31.3 28.7 27.7 Adm. 180 383 402 14.6 18.2 18.2 EBIT 206 222 210 16.7 10.5 9.5 Int Exp 20 51 59 1.6 2.4 2.7 EBT 186 171 151 15.1 8.1 6.8 EAT 112 103 91 9.1 4.9 4.1 Cash Div 50 50 50 4.0 2.4 2.3
66 Index AnalysesIndex Analyses An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year.
67 Basket Wonders’Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets Regular (thousands of $) Indexed (%) Assets 2005 2006 2007 2005 2006 2007 Cash 148 100 90 100.0 67.6 60.8 AR 283 410 394 100.0 144.9 139.2 Inv 322 616 696 100.0 191.3 216.1 Other CA 10 14 15 100.0 140.0 150.0 Tot CA 763 1,140 1,195 100.0 149.4 156.6 Net FA 349 631 701 100.0 180.8 200.9 LT Inv 0 50 50 100.0 inf. inf. Other LT 111 223 223 100.0 200.9 200.9 Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4
68 Basket Wonders’Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets Regular (thousands of $) Indexed (%) Liab+Equity 2005 2006 2007 2005 2006 2007 Note Pay 290 295 290 100.0 101.7 100.0 Acct Pay 81 94 94 100.0 116.0 116.0 Accr Tax 13 16 16 100.0 123.1 123.1 Other Accr 15 100 100 100.0 666.7 666.7 Tot CL 399 505 500 100.0 126.6 125.3 LT Debt 150 453 530 100.0 302.0 353.3 Equity 674 1,086 1,139 100.0 161.1 169.0 Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
69 Basket Wonders’ IndexedBasket Wonders’ Indexed Income StatementsIncome Statements Regular (thousands of $) Indexed (%) 2005 2006 2007 2005 2006 2007 Net Sales 1,235 2,106 2,211 100.0 170.5 179.0 COGS 849 1,501 1,599 100.0 176.8 188.3 Gross Profit 386 605 612 100.0 156.7 158.5 Adm. 180 383 402 100.0 212.8 223.3 EBIT 206 222 210 100.0 107.8 101.9 Int Exp 20 51 59 100.0 255.0 295.0 EBT 186 171 151 100.0 91.9 81.2 EAT 112 103 91 100.0 92.0 81.3 Cash Div 50 50 50 100.0 100.0 100.0

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Ratios

  • 1.
    1 Chapter 6Chapter 6 FinancialStatementFinancial Statement AnalysisAnalysis © Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI
  • 2.
    2 After studying Chapter6,After studying Chapter 6, you should be able to:you should be able to: Understand the purpose of basic financial statements and their contents. Explain why financial statement analysis is important to the firm and to outside suppliers of capital. Define, calculate, and categorize (according to liquidity, financial leverage, coverage, activity, and profitability) the major financial ratios and understand what they can tell us about the firm. Define, calculate, and discuss a firm’s operating cycle and cash cycle. Use ratios to analyze a firm's health and then recommend reasonable alternative courses of action to improve the health of the firm. Analyze a firm’s return on investment (i.e., “earning power”) and return on equity using a DuPont approach. Understand the limitations of financial ratio analysis. Use trend analysis, common-size analysis, and index analysis to gain additional insights into a firm's performance.
  • 3.
    3 FinancialFinancial Statement AnalysisStatement Analysis FinancialStatements A Possible Framework for Analysis Balance Sheet Ratios Income Statement and Income Statement/Balance Sheet Ratios Trend Analysis Common-Size and Index Analysis
  • 4.
    4 Examples of ExternalUsesExamples of External Uses of Statement Analysisof Statement Analysis Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm. BondholdersBondholders -- Focus on the long-term cash flow of the firm. ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
  • 5.
    5 Examples of InternalUsesExamples of Internal Uses of Statement Analysisof Statement Analysis PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities. ControlControl -- Focus on return on investment for various assets and asset efficiency. UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
  • 6.
    6 Primary Types ofPrimaryTypes of Financial StatementsFinancial Statements Income StatementIncome Statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance SheetBalance Sheet A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
  • 7.
    7 Basket Wonders’ BalanceBasketWonders’ Balance Sheet (Asset Side)Sheet (Asset Side) a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. Cash and C.E. $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Expdd 5 Accum Tax Prepay 10 Current AssetsCurrent Assetsee $1,195$1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329) Net Fix. AssetsNet Fix. Assets $ 701$ 701 Investment, LT 50 Other Assets, LT 223 b Basket Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a
  • 8.
    8 Basket Wonders’ BalanceBasketWonders’ Balance Sheet (Liability Side)Sheet (Liability Side) a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested. Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxesdd 16 Other Accrued Liab.dd 100 Current Liab.Current Liab.ee $$ 500500 Long-Term Debtff 530 Shareholders’ Equity Com. Stock ($1 par)gg 200 Add Pd in Capitalgg 729 Retained Earningshh 210 TotalTotal EquityEquity $$1,1391,139 a,b Basket Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
  • 9.
    9 Basket Wonders’Basket Wonders’ IncomeStatementIncome Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. Net Sales $ 2,211 Cost of Goods Soldbb 1,599 Gross Profit $ 612 SG&A Expensescc 402 EBITd $ 210 Interest Expensee 59 EBTff $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53$ 53 Basket Wonders Statement of Earnings (in thousands)Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007for Year Ending December 31, 2007a
  • 10.
    10 Framework forFramework for FinancialAnalysisFinancial Analysis Analytical Tools UsedAnalytical Tools Used Sources and Uses Statement Statement of Cash Flows Cash Budgets 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. Trend / Seasonal ComponentTrend / Seasonal Component How much funding will be required in the future? Is there a seasonal component?
  • 11.
    11 Framework forFramework for FinancialAnalysisFinancial Analysis Health of a Firm Financial Ratios 1. Individually 2. Over time 3. In combination 4. In comparison 1. Analysis of the funds needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
  • 12.
    12 Framework forFramework for FinancialAnalysisFinancial Analysis ExamplesExamples:: Volatility in sales Volatility in costs Proximity to break-even point 1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm. Business riskBusiness risk relates to the risk inherent in the operations of the firm.
  • 13.
    13 Framework forFramework for FinancialAnalysisFinancial Analysis A Financial Manager must consider all three jointly when determining the financing needs of the firm. DeterminingDetermining thethe financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
  • 14.
    14 Framework forFramework for FinancialAnalysisFinancial Analysis NegotiationsNegotiations withwith suppliers ofsuppliers of capital.capital. DeterminingDetermining thethe financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
  • 15.
    15 Use of FinancialRatiosUse of Financial Ratios Types ofTypes of ComparisonsComparisons InternalInternal ComparisonsComparisons ExternalExternal ComparisonsComparisons A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.
  • 16.
    16 External Comparisons andExternalComparisons and Sources of Industry RatiosSources of Industry Ratios Examples: Risk ManagementRisk Management AssociationAssociation Dun & BradstreetDun & Bradstreet Almanac ofAlmanac of Business andBusiness and IndustrialIndustrial Financial RatiosFinancial Ratios This involves comparing the ratios of one firm with those of similarsimilar firms or with industry averages. SimilaritySimilarity is important as one should compare “apples to apples.”
  • 17.
    17 Liquidity RatiosLiquidity Ratios CurrentCurrent CurrentAssetsCurrent Assets Current LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to cover its current liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios $1,195$1,195 $500$500 = 2.392.39
  • 18.
    18 Liquidity RatioLiquidity Ratio ComparisonsComparisons BWIndustry 2.39 2.15 2.26 2.09 1.91 2.01 Year 2007 2006 2005 CurrentCurrent RatioRatio Ratio is stronger than the industry average.
  • 19.
    19 Liquidity RatiosLiquidity Ratios Acid-Test(Quick)Acid-Test (Quick) Current Assets - InvCurrent Assets - Inv Current LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to meet current liabilities with its most liquid assets. Balance Sheet Ratios Liquidity Ratios $1,195 - $696$1,195 - $696 $500$500 = 1.001.00
  • 20.
    20 Liquidity RatioLiquidity Ratio ComparisonsComparisons BWIndustry 1.00 1.25 1.04 1.23 1.11 1.25 Year 2007 2006 2005 Acid-Test RatioAcid-Test Ratio Ratio is weaker than the industry average.
  • 21.
    21 Summary of theLiquiditySummary of the Liquidity Ratio ComparisonsRatio Comparisons Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. RatioRatio BWBW IndustryIndustry Current 2.39 2.15 Acid-Test 1.00 1.25
  • 22.
    22 Current Ratio --TrendCurrent Ratio -- Trend Analysis ComparisonAnalysis Comparison Trend Analysis of Current Ratio 1.5 1.7 1.9 2.1 2.3 2.5 2005 2006 2007 Analysis Year RatioValue BW Industry
  • 23.
    23 Acid-Test Ratio --TrendAcid-Test Ratio -- Trend Analysis ComparisonAnalysis Comparison Trend Analysis of Acid-Test Ratio 0.5 0.8 1.0 1.3 1.5 2005 2006 2007 Analysis Year RatioValue BW Industry
  • 24.
    24 Summary of theLiquiditySummary of the Liquidity Trend AnalysesTrend Analyses The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable. This indicates that inventoriesinventories are a significant problem for BWBW. The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
  • 25.
    25 Financial Leverage RatiosFinancialLeverage Ratios Debt-to-EquityDebt-to-Equity Total DebtTotal Debt Shareholders’ EquityShareholders’ Equity For Basket Wonders December 31, 2007 Shows the extent to which the firm is financed by debt. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $1,139$1,139 = .90.90
  • 26.
    26 Financial LeverageFinancial Leverage RatioComparisonsRatio Comparisons BW Industry .90 .90 .88 .90 .81 .89 Year 2007 2006 2005 Debt-to-Equity RatioDebt-to-Equity Ratio BW has average debt utilization relative to the industry average.
  • 27.
    27 Financial Leverage RatiosFinancialLeverage Ratios Debt-to-Total-AssetsDebt-to-Total-Assets Total DebtTotal Debt Total AssetsTotal Assets For Basket Wonders December 31, 2007Shows the percentage of the firm’s assets that are supported by debt financing. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $2,169$2,169 = .47.47
  • 28.
    28 Financial LeverageFinancial Leverage RatioComparisonsRatio Comparisons BW Industry .47 .47 .47 .47 .45 .47 Year 2007 2006 2005 Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio BW has average debt utilization relative to the industry average.
  • 29.
    29 Financial Leverage RatiosFinancialLeverage Ratios Total CapitalizationTotal Capitalization Long-term DebtLong-term Debt Total CapitalizationTotal Capitalization For Basket Wonders December 31, 2007 Shows the relative importance of long-term debt to the long-term financing of the firm. Balance Sheet Ratios Financial Leverage Ratios $530$530 $1,669$1,669 = .32.32 (i.e., LT-Debt + Equity)
  • 30.
    30 Financial LeverageFinancial Leverage RatioComparisonsRatio Comparisons BW Industry .32 .30 .32 .31 .37 .32 Year 2007 2006 2005 Total Capitalization RatioTotal Capitalization Ratio BW has average long-term debt utilization relative to the industry average.
  • 31.
    31 Coverage RatiosCoverage Ratios InterestCoverageInterest Coverage EBITEBIT Interest ChargesInterest Charges For Basket Wonders December 31, 2007Indicates a firm’s ability to cover interest charges. Income Statement Ratios Coverage Ratios $210$210 $59$59 = 3.563.56
  • 32.
    32 CoverageCoverage Ratio ComparisonsRatio Comparisons BWIndustry 3.56 5.19 4.35 5.02 10.30 4.66 Year 2007 2006 2005 Interest Coverage RatioInterest Coverage Ratio BW has below average interest coverage relative to the industry average.
  • 33.
    33 Coverage Ratio --TrendCoverage Ratio -- Trend Analysis ComparisonAnalysis Comparison Trend Analysis of Interest Coverage Ratio 3.0 5.0 7.0 9.0 11.0 2005 2006 2007 Analysis Year RatioValue BW Industry
  • 34.
    34 Summary of theCoverageSummary of the Coverage Trend AnalysisTrend Analysis This indicates that low earningslow earnings (EBIT) may be a potential problem for BWBW. Note, we know that debt levelsdebt levels are in line with the industryindustry averages. The interest coverage ratio for BWBW has been falling since 2005. It has been below industryindustry averages for the past two years.
  • 35.
    35 Activity RatiosActivity Ratios ReceivableTurnoverReceivable Turnover Annual Net Credit SalesAnnual Net Credit Sales ReceivablesReceivables For Basket Wonders December 31, 2007Indicates quality of receivables and how successful the firm is in its collections. Income Statement / Balance Sheet Ratios Activity Ratios $2,211$2,211 $394$394 = 5.615.61 (Assume all sales are credit sales.)
  • 36.
    36 Activity RatiosActivity Ratios AvgCollection PeriodAvg Collection Period Days in the YearDays in the Year Receivable TurnoverReceivable Turnover For Basket Wonders December 31, 2007 Average number of days that receivables are outstanding. (or RT in days) Income Statement / Balance Sheet Ratios Activity Ratios 365365 5.615.61 = 65 days65 days
  • 37.
    37 ActivityActivity Ratio ComparisonsRatio Comparisons BWIndustry 65.0 65.7 71.1 66.3 83.6 69.2 Year 2007 2006 2005 Average Collection PeriodAverage Collection Period BW has improved the average collection period to that of the industry average.
  • 38.
    38 Activity RatiosActivity Ratios PayableTurnover (PT)Payable Turnover (PT) Annual Credit PurchasesAnnual Credit Purchases Accounts PayableAccounts Payable For Basket Wonders December 31, 2007 Indicates the promptness of payment to suppliers by the firm. Income Statement / Balance Sheet Ratios Activity Ratios $1551$1551 $94$94 = 16.516.5 (Assume annual credit purchases = $1,551.)
  • 39.
    39 Activity RatiosActivity Ratios PTin DaysPT in Days Days in the YearDays in the Year Payable TurnoverPayable Turnover For Basket Wonders December 31, 2007 Average number of days that payables are outstanding. Income Statement / Balance Sheet Ratios Activity Ratios 365365 16.516.5 = 22.1 days22.1 days
  • 40.
    40 ActivityActivity Ratio ComparisonsRatio Comparisons BWIndustry 22.1 46.7 25.4 51.1 43.5 48.5 Year 2007 2006 2005 Payable Turnover in DaysPayable Turnover in Days BW has improved the PT in Days. Is this good?Is this good?
  • 41.
    41 Activity RatiosActivity Ratios InventoryTurnoverInventory Turnover Cost of Goods SoldCost of Goods Sold InventoryInventory For Basket Wonders December 31, 2007 Indicates the effectiveness of the inventory management practices of the firm. Income Statement / Balance Sheet Ratios Activity Ratios $1,599$1,599 $696$696 = 2.302.30
  • 42.
    42 ActivityActivity Ratio ComparisonsRatio Comparisons BWIndustry 2.30 3.45 2.44 3.76 2.64 3.69 Year 2007 2006 2005 Inventory Turnover RatioInventory Turnover Ratio BW has a very poor inventory turnover ratio.
  • 43.
    43 Inventory Turnover RatioInventoryTurnover Ratio --Trend Analysis--Trend Analysis ComparisonComparison Trend Analysis of Inventory Turnover Ratio 2.0 2.5 3.0 3.5 4.0 2005 2006 2007 Analysis Year RatioValue BW Industry
  • 44.
    44 Activity RatiosActivity Ratios TotalAsset TurnoverTotal Asset Turnover Net SalesNet Sales Total AssetsTotal Assets For Basket Wonders December 31, 2007 Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement / Balance Sheet Ratios Activity Ratios $2,211$2,211 $2,169$2,169 = 1.021.02
  • 45.
    45 ActivityActivity Ratio ComparisonsRatio Comparisons BWIndustry 1.02 1.17 1.03 1.14 1.01 1.13 Year 2007 2006 2005 Total Asset Turnover RatioTotal Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak?Why is this ratio considered weak?
  • 46.
    46 Profitability RatiosProfitability Ratios GrossProfit MarginGross Profit Margin Gross ProfitGross Profit Net SalesNet Sales For Basket Wonders December 31, 2007 Indicates the efficiency of operations and firm pricing policies. Income Statement / Balance Sheet Ratios Profitability Ratios $612$612 $2,211$2,211 = .277277
  • 47.
    47 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BWIndustry 27.7% 31.1% 28.7 30.8 31.3 27.6 Year 2007 2006 2005 Gross Profit MarginGross Profit Margin BW has a weak Gross Profit Margin.
  • 48.
    48 Gross Profit Margin--Gross Profit Margin -- Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Gross Profit Margin 25.0 27.5 30.0 32.5 35.0 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
  • 49.
    49 Profitability RatiosProfitability Ratios NetProfit MarginNet Profit Margin Net Profit after TaxesNet Profit after Taxes Net SalesNet Sales For Basket Wonders December 31, 2007 Indicates the firm’s profitability after taking account of all expenses and income taxes. Income Statement / Balance Sheet Ratios Profitability Ratios $91$91 $2,211$2,211 = .041.041
  • 50.
    50 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BWIndustry 4.1% 8.2% 4.9 8.1 9.0 7.6 Year 2007 2006 2005 Net Profit MarginNet Profit Margin BW has a poor Net Profit Margin.
  • 51.
    51 Net Profit Margin--Net Profit Margin -- Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Net Profit Margin 4 5 6 7 8 9 10 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
  • 52.
    52 Profitability RatiosProfitability Ratios Returnon InvestmentReturn on Investment Net Profit after TaxesNet Profit after Taxes Total AssetsTotal Assets For Basket Wonders December 31, 2007Indicates the profitability on the assets of the firm (after all expenses and taxes). Income Statement / Balance Sheet Ratios Profitability Ratios $91$91 $2,160$2,160 = .042.042
  • 53.
    53 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BWIndustry 4.2% 9.8% 5.0 9.1 9.1 10.8 Year 2007 2006 2005 Return on InvestmentReturn on Investment BW has a poor Return on Investment.
  • 54.
    54 Return on Investment–Return on Investment – Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Return on Investment 4 6 8 10 12 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
  • 55.
    55 Profitability RatiosProfitability Ratios Returnon EquityReturn on Equity Net Profit after TaxesNet Profit after Taxes Shareholders’ EquityShareholders’ Equity For Basket Wonders December 31, 2007Indicates the profitability to the shareholders of the firm (after all expenses and taxes). Income Statement / Balance Sheet Ratios Profitability Ratios $91$91 $1,139$1,139 = .08.08
  • 56.
    56 ProfitabilityProfitability Ratio ComparisonsRatio Comparisons BWIndustry 8.0% 17.9% 9.4 17.2 16.6 20.4 Year 2007 2006 2005 Return on EquityReturn on Equity BW has a poor Return on Equity.
  • 57.
    57 Return on Equity--Return on Equity -- Trend Analysis ComparisonTrend Analysis Comparison Trend Analysis of Return on Equity 7.0 10.5 14.0 17.5 21.0 2005 2006 2007 Analysis Year RatioValue(%) BW Industry
  • 58.
    58 Return on InvestmentandReturn on Investment and the Du Pont Approachthe Du Pont Approach ROIROI2007 = .041 x 1.02 = .042.042 or 4.2%4.2% ROIROIIndustry = .082 x 1.17 = .098.098 or 9.8%9.8% ROIROI = Net profit margin X Total asset turnover Earning PowerEarning Power = Sales profitability X Asset efficiency
  • 59.
    59 Return on EquityandReturn on Equity and the Du Pont Approachthe Du Pont Approach ROEROE2007 = .041 x 1.02 x 1.90 = .080.080 ROEROEIndustry = .082 x 1.17 x 1.88 = .179179 Return On EquityReturn On Equity = Net profit margin X Total asset turnover X Equity Multiplier Equity MultiplierEquity Multiplier = Total Assets Shareholders’ Equity
  • 60.
    60 Summary of theProfitabilitySummary of the Profitability Trend AnalysesTrend Analyses The profitability ratios for BWBW have ALL been falling since 2005. Each has been below the industryindustry averages for the past three years. This indicates that COGSCOGS and administrative costsadministrative costs may both be too high and a potential problem for BWBW. Note, this result is consistent with the low interest coverage ratio.
  • 61.
    61 Summary of RatioAnalysesSummary of Ratio Analyses Inventories are too high. May be paying off creditors (accounts payable) too soon. COGS may be too high. Selling, general, and administrative costs may be too high.
  • 62.
    62 Common-size AnalysisCommon-size Analysis Ananalysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues.
  • 63.
    63 Basket Wonders’ CommonBasketWonders’ Common Size Balance SheetsSize Balance Sheets Regular (thousands of $) Common-Size (%) Assets 2005 2006 2007 2005 2006 2007 Cash 148 100 90 12.10 4.89 4.15 AR 283 410 394 23.14 20.06 18.17 Inv 322 616 696 26.33 30.14 32.09 Other CA 10 14 15 0.82 0.68 0.69 Tot CA 763 1,140 1,195 62.39 55.77 55.09 Net FA 349 631 701 28.54 30.87 32.32 LT Inv 0 50 50 0.00 2.45 2.31 Other LT 111 223 223 9.08 10.91 10.28 Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0
  • 64.
    64 Basket Wonders’ CommonBasketWonders’ Common Size Balance SheetsSize Balance Sheets Regular (thousands of $) Common-Size (%) Liab+Equity 2005 2006 2007 2005 2006 2007 Note Pay 290 295 290 23.71 14.43 13.37 Acct Pay 81 94 94 6.62 4.60 4.33 Accr Tax 13 16 16 1.06 0.78 0.74 Other Accr 15 100 100 1.23 4.89 4.61 Tot CL 399 505 500 32.62 24.71 23.05 LT Debt 150 453 530 12.26 22.16 24.44 Equity 674 1,086 1,139 55.11 53.13 52.51 Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0
  • 65.
    65 Basket Wonders’ CommonBasketWonders’ Common Size Income StatementsSize Income Statements Regular (thousands of $) Common-Size (%) 2005 2006 2007 2005 2006 2007 Net Sales 1,235 2,106 2,211 100.0 100.0 100.0 COGS 849 1,501 1,599 68.7 71.3 72.3 Gross Profit 386 605 612 31.3 28.7 27.7 Adm. 180 383 402 14.6 18.2 18.2 EBIT 206 222 210 16.7 10.5 9.5 Int Exp 20 51 59 1.6 2.4 2.7 EBT 186 171 151 15.1 8.1 6.8 EAT 112 103 91 9.1 4.9 4.1 Cash Div 50 50 50 4.0 2.4 2.3
  • 66.
    66 Index AnalysesIndex Analyses Ananalysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year.
  • 67.
    67 Basket Wonders’Basket Wonders’ IndexedBalance SheetsIndexed Balance Sheets Regular (thousands of $) Indexed (%) Assets 2005 2006 2007 2005 2006 2007 Cash 148 100 90 100.0 67.6 60.8 AR 283 410 394 100.0 144.9 139.2 Inv 322 616 696 100.0 191.3 216.1 Other CA 10 14 15 100.0 140.0 150.0 Tot CA 763 1,140 1,195 100.0 149.4 156.6 Net FA 349 631 701 100.0 180.8 200.9 LT Inv 0 50 50 100.0 inf. inf. Other LT 111 223 223 100.0 200.9 200.9 Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4
  • 68.
    68 Basket Wonders’Basket Wonders’ IndexedBalance SheetsIndexed Balance Sheets Regular (thousands of $) Indexed (%) Liab+Equity 2005 2006 2007 2005 2006 2007 Note Pay 290 295 290 100.0 101.7 100.0 Acct Pay 81 94 94 100.0 116.0 116.0 Accr Tax 13 16 16 100.0 123.1 123.1 Other Accr 15 100 100 100.0 666.7 666.7 Tot CL 399 505 500 100.0 126.6 125.3 LT Debt 150 453 530 100.0 302.0 353.3 Equity 674 1,086 1,139 100.0 161.1 169.0 Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
  • 69.
    69 Basket Wonders’ IndexedBasketWonders’ Indexed Income StatementsIncome Statements Regular (thousands of $) Indexed (%) 2005 2006 2007 2005 2006 2007 Net Sales 1,235 2,106 2,211 100.0 170.5 179.0 COGS 849 1,501 1,599 100.0 176.8 188.3 Gross Profit 386 605 612 100.0 156.7 158.5 Adm. 180 383 402 100.0 212.8 223.3 EBIT 206 222 210 100.0 107.8 101.9 Int Exp 20 51 59 100.0 255.0 295.0 EBT 186 171 151 100.0 91.9 81.2 EAT 112 103 91 100.0 92.0 81.3 Cash Div 50 50 50 100.0 100.0 100.0