3 Evaluation methods for working with financial statements. The first is RATIO ANALYSIS. This helps you evaluate the financial performance of a company. Chapter 3+4 are combined. You try to answer one main question: How ratio analysis is used to evaluate the financial performance of a company. In order to do ratio analysis you need data, and the data comes from financial statements. The two main statements that we used to calculate the ratio: balance sheet and income statement. 3 & 4 chapters are accounting review. He imported info that reminds us of those two statements. All we need to study is this power point. Review of balance sheet: How finance people read balance sheet is a bit different because it fits our needs. Balance sheet is two sides. One side is called assets and other side is called liabilities and equity. The assets side is everything the company owns. The liability side is everything the company owes others. Other definition could be, the assets could be considered the companies investment. If asset is the companies the investments then liabilities is where we get the money from to fund the investments. Capital budgeting team from finance determines if they can afford the projects and liabilities they can afford before accounting department gets its it. Assets should always equal the liabilities. Bonds are long term debt. Total debt equals depts. Plus equity. Short-term debt is current liabilities and long term debt is bonds. Short term is like A.P., s-t notes payable, current liabilities. Total assets tell you the value of the company. The value=D + E. Income statements = revenues-expenses=net income or net loss. They show whether the company makes profit or losses, revenues and expenses. The very important number is net income. Whether it is positive or negative. If it positive then perfect, everyone is happy…to a certain extent. As soon as you have profit, you have to deduct taxes (corporate taxes) The rest is divided between dividends and retained earnings, depends how much is distributed where. Depends on many factors. They usually start by putting a lot in retained earning and use it as an internal source of finance, the management will do anything they can do in order to maximize RE. The ratio we use to calculate the RE from Net Income is called the RETENTION RATIO= THE RATIO THAT WE USE TO CALCULATE RETAINED EARNING FROM NET INCOME. The name of the ratio that goes to dividends from net income is called dividend payout ratio. Revenues maybe up to 90% of them comes from SALES. The other 10% come from like investments from shares you receive dividends, you receive INTERESTS from BONDS. Expenses, since most of the money comes from sales then the most of the expenses come from COGS. The rest is salaries, maintenance etc. Sales-COGS=Gross profit-rest=net incomes-taxes=real net income that goes two ways. Earning per share=EPS =Total net incomes/shares outstanding. Means like $162/100= $1.62 means eve ...

1. 3 Evaluation methods for working with financial statements.
The first is RATIO ANALYSIS.
This helps you evaluate the financial performance of a
company.
Chapter 3+4 are combined. You try to answer one main
question: How ratio analysis is used to evaluate the financial
performance of a company.
In order to do ratio analysis you need data, and the data comes
from financial statements. The two main statements that we
used to calculate the ratio: balance sheet and income statement.
3 & 4 chapters are accounting review. He imported info that
reminds us of those two statements. All we need to study is this
power point.
Review of balance sheet:
How finance people read balance sheet is a bit different because
it fits our needs.
Balance sheet is two sides. One side is called assets and other
side is called liabilities and equity.
The assets side is everything the company owns.
The liability side is everything the company owes others.
Other definition could be, the assets could be considered the
companies investment.
If asset is the companies the investments then liabilities is
where we get the money from to fund the investments.
Capital budgeting team from finance determines if they can
afford the projects and liabilities they can afford before
accounting department gets its it.
Assets should always equal the liabilities.
Bonds are long term debt. Total debt equals depts. Plus equity.
Short-term debt is current liabilities and long term debt is
bonds. Short term is like A.P., s-t notes payable, current
liabilities.
Total assets tell you the value of the company.

2. The value=D + E.
Income statements = revenues-expenses=net income or net loss.
They show whether the company makes profit or losses,
revenues and expenses.
The very important number is net income. Whether it is positive
or negative.
If it positive then perfect, everyone is happy…to a certain
extent.
As soon as you have profit, you have to deduct taxes (corporate
taxes)
The rest is divided between dividends and retained earnings,
depends how much is distributed where. Depends on many
factors. They usually start by putting a lot in retained earning
and use it as an internal source of finance, the management will
do anything they can do in order to maximize RE.
The ratio we use to calculate the RE from Net Income is called
the
RETENTION RATIO= THE RATIO THAT WE USE TO
CALCULATE RETAINED EARNING FROM NET INCOME.
The name of the ratio that goes to dividends from net income is
called dividend payout ratio.
Revenues maybe up to 90% of them comes from SALES. The
other 10% come from like investments from shares you receive
dividends, you receive INTERESTS from BONDS.
Expenses, since most of the money comes from sales then the
most of the expenses come from COGS. The rest is salaries,
maintenance etc.
Sales-COGS=Gross profit-rest=net incomes-taxes=real net
income that goes two ways.
Earning per share=EPS =Total net incomes/shares outstanding.
Means like $162/100= $1.62 means every share earns $1.62 per
share but only if management says they are going to pay out
dividends. It is not how much you get necessarily.
If you want to calculate how much you get per share then

3. calculate dividends per share ratio.
Dividends per share ratio= Total dividends paid/shares
outstanding
Example=$100/100=$1.00 per share YOU WILL ACTUALLY
GET.
Five categories of ratios: 4 groups with 4 ratios. Each group
measures different things in the company.
EC and HW
Liquidity Ratios (short-term solvency)
Measure the liquidity, before you invest you want to get this
ratio.
Efficiency Ratios (asset utilization)
How efficient is the company management in running and
generating sales.
Leverage Ratios (long-term solvency)
Talking about how much the company uses the debt to cover…
Profitability Ratios
Market Value Ratios (To be discussed later)
Liquidity Ratios
The more info and ratios you can calculate the more informed
decision you will be able to make.
Measures the ability of the firm to meet its short-term financial
obligations.
Does the firm have short-term assets to pay off short-term
liabilities?
I need to measure this before I invest my money in this
company.
Current ratio= Current Ratio
Current Liabilities
Is there a sufficient amount of current assets to pay off current
liabilities? What is the cushion of safety?
How we use the current ratio to evaluate the financial
performance of the company? Answer=
There are 3 steps to the first main question:
-Calculation, you calculate the ratio

4. -Interpretation, what does that ratio mean
-Evaluation; So what, is this good or bad? You try to determine
if the ratio is good or bad you have to compare the ratio with a
benchmark (something similar)
There are 3 benchmarks
-Compare the ratio of the firm with a comparable firm
-You compare the ratio of this firm with the past year’s ratio
(for the same firm)
-You compare the ratio with the industry ratio
Now apply ration analysis.
How do we use current ratio, step number one…calculate
current ratio.
Current assets is brought from balance sheet, Current liabilities
from balance sheet. Example $1,230/$230=5.35x.
What does this mean, assets are five times as much as it’s
liabilities.
Evaluation, compare the number based on benchmark.
Well, based on previous years ratio for this company then bad
because every year it has been decreasing. I would not invest in
this company.
The easiest way for this class would be to find current ratio
with previous years and also compare with another company.
This is the first member of the liquidity group.
The second member of the liquidity group is QUICK RATIO
Quick Ratio is more accurate measure of liquidity than current
ratio.
Inventory is the least liquid asset so you remove it.
Quick Ratio or Acid Test Ratio= Current liabilities-Inventory
Current Liabilities
Example= $1,230-$625/$230=2.63x
Interpret-the first is only has 2.63 times more than the
liabilities.

5. NWC to TA we are not going to have to calculate this ratio, he
will substitute it.
Now you subtract everything you don’t need and get cash ratio.
Cash Ratio= Cash/Current Liabilities
$175/$230= .75
Efficiency Ratio is the second group of 5
How well is the firm utilizing all of its resources (financial
resources, money, land, capital, machinery, labor, physical) to
generate sales. Profitability does not mean efficiency.
Receivables turnover ratio= Sales
Accounts Receivable
Is the level of accounts receivable, appropriate given the firm’s
sales.
How well people are paying you. These are sales on credit.
Bring sales from Income Statement, AR from Balance Sheet.
Example= $1450/$430=3.37x
Accounts receivable sale on credit is almost 30% the sales
volume
Compare this number to the benchmark, compare it to a
comparable…others is 15% and I am 30%. I failed to liquidate
as much as I can from my issues.
I will not know I have a problem until I compare to the
benchmark.
Average Collection Period= Accounts Receivables
(Day’s sales in receivables) Daily Credit Sales
How long does it take the firm to collect the credits or money
from its customers?
ACP=$430
$1450/365 (days in a year)
=108.24 days

6. Compare this number to benchmark to see if it’s good or bad.
Inventory Turnover Ratio=Cost of goods sold
Inventory
Tells us the level of inventory appropriate given the firm’s
sales.
How many times the company is capable of turning the
inventory into cash or liquid.
The comparable firm’s ratio in benchmark is very important in
this one.
Perishable goods rate should be higher, so when you compare
then it is important to compare it to another firm. Cannot be a
different industry when comparing.
Example= $875/$625=1.40x
1.4 time the company turns inventory into cash
We have to compare this with a benchmark.
Fixed asset turnover ratio= Sales
Net Fixed Assets
It is used to calculate how effective is the firm in utilizing its
fixed assets to generate sales.
Example: $1,450/$1,300=1.12x
For every dollar we spent in fixed of assets we generate 1.12
dollars in sales.
The higher the number the more efficient because you get more
money per dollar you spent.
Over investing is when the number is two low because you are
investing more than what you are actually getting back in sales.
Total Asset Turnover Rate= Sales
Total Assets
Number tells us how efficient is the firm in using its total assets
to generate sales.
Example= $1450/$2530=0.57X
Interpret= for every dollar you spend in total assets you get

7. only .57 in sales
Compare from benchmark.
Leverage Ratios Only Two Ratios
Used to measure the extent to which non-owner supplied funds
have been used to finance the firm’s assets.
Two types: Balance Sheet leverage ratios, Coverage Ratios
How much the company uses debt to finance its operation or
assets.
The money comes from stocks and bonds.
Why do we care about debt? Debt is a measure of risk so you
can measure how much risk the company has.
Why debt is risky: As a company, I am obligated by law to pay
back the debt with interest whether I am doing good or bad over
a period of time.
You are exposed to bankruptcy if you don’t. If word leaks that
you don’t pay on time then that doesn’t look good.
Lets measure how risky a company is.
We use leverage ratio.
Debt Ratio= Total Debt
Total Assets
Measures how much debt the company uses to fund its total
assets.
Example: $230+$600 (current liabilities+ bonds)
If debt ratio equals 33% it means that almost all capital comes
from debt, or 33% of capital comes from debt.
Don’t learn equity multiplier
For average investor, they are risk adverse so a company looks
better if they are less risky. If debt is good or bad it depends on
who is looking.
More Debt, Less TIE
Times Interest Earned Ratio= Operating Income

8. Interest Expense
If we have too much debt, it will impact our TIE ratio.
Do we have enough money, how many times can we cover the
interest that we have to pay to our debt holder.
Do we have enough op income then how many times can we pay
the interest to our debt holders.
5.50 time is the answer to example.
Our op income is as 5.5 times the interest owed to our debt
holders.
Profitability Ratios
How effective or efficient is the firm in generating profit.
3 main ratios.
Net Profit Margin= Net Income
Sales
The portion of every dollar of sales that is dedicated to profit or
the percentage.
The amount of net profit for each dollar of sales
If the answer is 11% mean that almost 11% of every dollar of
sales is dedicated to profit.
Compare to the benchmark before you make a decision.
ROA= Net Income
Total Assets
Powerpoint example. Almost 6.4 percent spent on each dollar is
dedicated to profit.
Return on Equity= Net Income
Common Equity
This measures whether this management is effective in using the
shareholders money. Using or investing the money from
shareholders.
So if we end up almost 10%, almost 10% of share holders
money is dedicated to profit.

9. WE don’t have to learn dupont system.
Summary of Simsboro Computer & Industry
More liquidity is good, so if the company number is higher
than its better.
Acid-test ratio, if it is lower than it is not cool.
Extra Credit- Create table of a company that compares to
benchmark.
Interpret the table, briefly.
ALL OF THE RATIOS FOR THE EXTRA CREDIT
Make a power point with clusters of the ratios per group and a
little explanation on the bottom of the each slide
Introduction to Halcrow
Halcrow Group Limited is a multidisciplinary consultancy
group specialising in the provision of planning, design and
management services for infrastructure development throughout
the world. Within this, the Group’s main interests are
transportation, water,property and consulting. Although
Halcrow has a background in civil engineering and associated
specialisms,in recent years the group has extended its range of
disciplines to cover architecture, project management,
environmental science, transport planning and other non-
engineering but related skills.
Unlike many organisations, Halcrow does not have a mission
statement, arguing that their ‘purpose … to sustain and improve
the quality of people’s lives’describes their approach better

10. (Halcrow, 2003). This purpose is underpinned by a series of
values which outline those things that are important to the
Group:‘Skills and innovation; Enjoying what we do; Delivering
within time and budget’, codes of business behaviour and
business principles.Halcrow’s first projects outside the UK were
undertaken in the 1890s, such work now accounting for nearly
40 per cent of an annual turnover in excess of £200 million with
the Group currently undertaking projects in over 70 countries.
Recent projects in which Halcrow have been involved include
the Channel Tunnel Rail Link, road construction near the
Stonehenge World heritage Site, the International Congress
Centre in Rome, Kuala Lumpur International Airport, new and
refurbished stands for Chelsea Football Club, coordination of
wetland conservation and river basin management for the
Danube and its tributaries and managing pollution risk from the
animal mass burial sites arising from the UK’s 2001 foot and
mouth disease outbreak.
Halcrow was founded in 1868 by Thomas Meik,the company
becoming Sir William Halcrow & Partners in 1941. In 1985 a
private limited company bearing the same name was formed, the
most recent change being in 1998, when the various Halcrow
businesses and departments became Halcrow Group Limited.
The Halcrow Trust owns 90 per cent of Halcrow, with the
remaining 10 per cent by its employees. Halcrow has grown
extensively over the past decade and now operates through a
network of 29 UK and 32 international offices. As part of this
growth, the number of employees has increased from 1,700 to
nearly 5,000 worldwide. Approximately 80 per cent of
Halcrow’s employees are classified by the Group as
professional and technical (P&T) staff who have a minimum of
an undergraduate degree in engineering or a related subject. The
majority are engineers who are also members of a relevant
professional institution or are undergoing training to gain
membership. The remaining 20 per cent of employees, including
those in human resources, are classified by Halcrow as non-P&T
and provide corporate support services.

11. Halcrow Group’s strategy
As a result of restructuring to meet the future needs of the
business environment, Halcrow’s operations were brought
together in 2001 as four main business groups: Consulting,
Property, Transport and Water. These operate as a matrix
structure across the Group’s eight geographical regions, this
structure facilitating appropriate employees or teams to be
brought together for specific projects throughout the world
(Figure 1). Each of the four business groups is led by a
management team comprising five people including a Group
board director or managing director.
Within each business group, P&T staff are assigned to technical
skills groups the leader of whom is responsible for their training
and career development. Employees are also assigned to an
office in one of the regions. These vary in size from less than
ten to more than 500 employees. The business groups and
regional offices are supported by Corporate Support Services,
comprising all the corporate and business support functions,
including human resources, and located predominantly within
the UK. At the time of writing, the human resource function had
31 employees divided between three teams: Personnel (22),
Pensions (3) and Training (6) with a director at the executive
level.
In 2004, Halcrow launched its change program, ‘Act now’,
which was designed to help the Group ‘to continue to develop in
a dynamic and sustainable way’. The focus of ‘Act now’ was to
align employees’ behaviors and approaches to Halcrow’s
purpose, values, codes of behavior and business principles
thereby improving individual, team and overall business
performance. This was summarized in Act Now: Your Pocket
Guide to Halcrow’s Change Program (Halcrow, 2004b: 8) as:
To take Halcrow’s existing personality, strengthen all those
things that are good about it, for example,
our …
1. technical competence
1. dependability

12. 1. friendliness
1. reputation for being a safe pair of hands
1. Commitment
1. pride in one’s profession
… and give it some added extras …
1. passion
1. dynamism
1. fleetness of foot
1. better listening skills
1. excitement
1. innovation
1. confidence (with a clear sense of self)
1. being more celebratory
1. consistent delivery to expectation
1. greater commercial edge
1. being performance driven.
This change program is intended to be continuous rather than
having a specific end date. It emphasizes the need for flexibility
and the sharing of good practices and learning throughout the
Group, the centrality of employees to achieving this, and the
need to monitor and evaluate.
SHRM at Halcrow
The ‘Act now’ change program is central to everything that
Halcrow plans to do in relation to the HRM strategy. The
overriding concern is to change the organization’s culture. It is
often said that the Group is full of people who are professional
engineers and who take pride in a job well done. In essence,
technical excellence takes precedence over commercial success.
By the very nature of their training, Halcrow people tend to be
concerned with ‘detail’ rather than seeing the bigger picture.
This has served the Group well. But a recent client satisfaction
survey commissioned by the Group did not show Halcrow in a
uniformly glowing light. It reported that Halcrow emerged as
technically excellent and a ‘safe pair of hands’ but those clients
were looking for much more than technical competence and a

13. track record. They wanted business partners whose behaviors
were aligned to their own needs. In addition the Group was also
seen as rather ‘grey’. The challenge for Halcrow is to retain the
reputation for technical excellence and reliability while
becoming increasingly commercially aware, flexible and,above
all, more responsive to customer needs.
Halcrow has designed several key HRM initiatives to support
the change program. These are:
The development of core competences -This is seen as
important because Halcrow employees have traditionally
emphasised the importance of professional qualifications above
all else. The development of a core competence programme is
designed to move the emphasis from what people know to what
they can do.
The introduction of 360-degree appraisal-It is envisaged that
this will make a significant contribution the ‘Act now’ culture
change initiative. The Group’s culture has always tended to
reinforce the importance of hierarchy in that employees have
been very conscious of their position in the organization. In
addition, there had been something of an ‘ignore and deflect
culture’ in which people sought to evade responsibility for
mistakes rather than being open enough to learn from them. By
opening up the system of employee appraisal to people above
and below the individual being appraised and by seeking the
views of significant other stakeholders, particularly customers,
Halcrow management believe that a far greater degree of
openness will be developed.
The instigation of a profit share bonus scheme- This is
particularly designed to create in employees a greater awareness
of the Group’s profit performance. In the view of senior
Halcrow management, this has the potential to make a major
contribution to fostering in Halcrow employees more
commercially aware values. In view of the fact that senior
management have set clear targets for increases in Halcrow’s
profit performance, greater knowledge of the Group’s
profitability is seen as an effective way of focusing the minds

14. of employees on profit performance.
The development of ‘ideas labs’ - This is an important part of
the Halcrow management of innovation programme which is
designed to promote innovative thinking and enable
commercially valuable ideas to be implemented. It is designed
to:
add value to the business;
1. encourage cross-integration between disciplines;
1. give staff ownership of the ideas put forward.
Overall, the key change issue that is driving SHRM is the need
for Halcrow to be more responsive in the light of a more
competitive industry. Therefore,the principal aim of the new HR
initiatives is to generate more competitive employee behaviours
which, in turn, is envisaged will generate better all-round
employee and business performance.
There are other critical issues facing HR at Halcrow.An
important one of these is a consequence of customer feedback.
Increasingly this shows that customers are taking technical
excellence for granted when making decisions about which
consultancy group to employ. In view of Halcrow’s reputation
for technical excellence among customers, this is bad news for
the Group. As the HR director explained the world has moved
on. Clients are now more demanding and want more all the
time. Among the most demanding clients are the public sector.
In the UK, Halcrow management feel that the UK government’s
Private Finance Initiative (PFI) has contributed to change in the
industry. (The PFI is a mechanism developed by the government
to raise money to pay for new buildings and services.Under PFI
schemes a public authority buys the services of private-sector
companies to design,build, finance and operate a public facility,
such as a hospital. The private-sector companies borrow the
money for the scheme and then the government pays an annual
fee to the companies under a longterm operating contract for the
services.)
Three examples of the more demanding nature of clients are
evident, each of which demands an HR response. The first is

15. clients asking for an assurance that the staff commencing work
on a project willstay with the Group for the duration of the
project. This is a key issue in an industry where the reputation
of the consultancy is such that, in effect, the staff appointed to a
project can be a more important factor in the client’s decision to
engage a particular consultancy than the consultancy group
itself. Theimplications for HR are twofold. First, it must assure
both external and internal clients that succession planning is in
place. In the past this was not an HR strength at Halcrow or
other similar consultancies,but is an issue that is now receiving
more attention.The second implication is the problem of
retention.There is a shortage of high-quality consultants
throughout the construction and engineering sectors and
competition for consultants is high. Like the sector in general,
staff turnover is high at Halcrow.
This is an issue that senior management knows must be
addressed. The problem is exacerbated by the declining number
of construction-related graduates in the UK, the number of
students studying relevant courses in the UK dropping by 10 per
cent in the late 1990s.
A second example of the more demanding nature of clients is
the requirement that companies state their policy and practice
on employee diversity and equal opportunities. Again this
presents a problem for companies in this sector, like Halcrow,
which has been traditionally male dominated and has, until
recently,employed considerable numbers of expatriates in its
overseas operations. In the UK onstruction industry as a whole,
the proportion of women employed is less than 9 per cent (Egan,
1998).
The third example of client demands is the requirement that
companies offer assurances over corporate governance. In the
light of corporate scandals such as Enron and Parmalat, this is
understandable.
The HR response to this is to ensure that global training of key
staff to ensure compliance with industry standards takes place.
In addition, organizational structure issues, such as the revision

16. of reporting relationships to ensure greater transparency, are
receiving attention.
The level of staff turnover at Halcrow and decline in the number
of graduates entering the construction-related industry has
shaped another HR priority for the Group. This is to define
more clearly a people statement that states more precisely what
is meant by ‘employer of choice’. In particular, Halcrow is
concerned about losing high-quality graduates to the financial
sector, both at the time of graduation and after they have
worked with the Group for a short period. High-quality
graduates can earn more money in financial services. In
addition, younger graduates are more concerned with the work–
life balance issues and their own staff development than were
their predecessors. A measure of the significance of this issue to
Halcrow is the large number of graduates employed each year,
this being 133 in 2003.
There is also worry over an ageing workforce in the
construction industry in general. It is felt by the HR director
that employees and employee issues at Halcrow need to be
higher on the list of Group priorities. Staff turnover is now a
key performance indicator for the HR director. In her view ‘it is
no good imposing things upon people at Halcrow – the Group
need to win hearts and minds’. This is typical of companies
employing a high proportion of professional staff who tend to
define, and act upon, their own standards of professional
behavior.
An HR strategy can be seen to be emerging at Halcrow, one that
will demand vision and skill from the HR function. According
to the HR director these are not qualities which the function has
always displayed. She feels that HR has a major job to do
because it has been perceived by Halcrow managers as
ineffective in the past. Halcrow managers are critical and
demanding and expect to receive effective assistance from the
service functions. However, the importance accorded to
technical excellence within Halcrow had created a culture where
service functions, such as HR, were under-valued. Halcrow has

17. traditionally called its staff ‘professional and technical’ and
‘non-professional and technical’ – the language reinforcing the
message of P&T staff as fee-earners being the most important
people in the Group. In addition, the HR function has been
largely administrative rather than strategic, a situation that is
now changing because of the HR challenges that Halcrow faces.
The HR director is very conscious of developing
professionalism in the HR team by developing team members’
confidence and helping them acquire professional qualifications
through the Chartered Institute of Personnel and Development
(CIPD).
The HR director argues that it is essential to develop a more
customer-focused HR team. The lead provided by the HR
director is important. Both she and the training manager have
experience in leading change programs in their previous
companies. It is also a help that the HR director has a close link
with the chief executive officer. This enables her to ask for the
support necessary to drive through the HR initiatives. The HR
director has also started giving increasing amounts of
‘professional’ work to her team members. An example of this
was a case where redundancies flowed from business
restructuring in one part of the Group. One member of the HR
team handled all aspects of this. The HR director is also paying
attention to mentoring and coaching her team.