1、Chapter 6,Financial Statement Analysis, Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI,Financial Statement Analysis,Financial Statements A Possible Framework for Analysis Balance Sheet Ratios Income Sta
2、tement and Income Statement/Balance Sheet Ratios Trend Analysis Common-Size and Index Analysis,Examples of External Uses of Statement Analysis,Trade Creditors - Focus on the liquidity of the firm. Bondholders - Focus on the long-term cash flow of the firm. Shareholders - Focus on the profitability a
3、nd long-term health of the firm.,Examples of Internal Uses of Statement Analysis,Plan - Focus on assessing the current financial position and evaluating potential firm opportunities. Control - Focus on return on investment for various assets and asset efficiency. Understand - Focus on understanding
4、how suppliers of funds analyze the firm.,.Primary Types of Financial Statements,Income Statement A summary of a firms revenues and expenses over a specified period, ending with net income or loss for the period.,Balance Sheet A summary of a firms financial position on a given date that shows total a
5、ssets = total liabilities + owners equity.,Basket Wonders Balance 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. ded
6、uctions for wear and tear.,Cash and C.E. $ 90 Acct. Rec.c 394 Inventories 696 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assetse $1,195 Fixed Assets (Cost)f 1030 Less: Acc. Depr. g (329) Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223 Total Assets b $2,169,Basket Wonders Balance Sheet
7、(thousands) Dec. 31, 2007a,Basket Wonders Balance 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. g. Original investment. h. Earnings reinveste
8、d.,Notes Payable $ 290 Acct. Payablec 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e $ 500 Long-Term Debt f 530 Shareholders Equity Com. Stock ($1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity $1,139 Total Liab/Equitya,b $2,169,Basket Wonders Balance Sheet
9、(thousands) Dec. 31, 2007,Basket Wonders Income 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
10、Sales $ 2,211 Cost of Goods Sold b 1,599 Gross Profit $ 612 SG&A Expenses c 402 EBITd $ 210 Interest Expensee 59 EBT f $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in RE $ 53,Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007a,.Framework for Financial
11、 Analysis,Negotiations with suppliers of capital.,Determining the financing needs of the firm.,1. Analysis of the fundsneeds of the firm.,2. Analysis of the financialcondition and profitabilityof the firm.,3. Analysis of the businessrisk of the firm.,.Use of Financial Ratios,Types of Comparisons Int
12、ernal Comparisons External Comparisons,A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.,External Comparisons and Sources of Industry Ratios,Examples: Risk Management Association Dun & Bradstreet Almanac of Business and Industrial
13、Financial Ratios,This involves comparing the ratios of one firm with those of similar firms or with industry averages. Similarity is important as one should compare “apples to apples.”,1.Liquidity Ratios,(1)CurrentCurrent Assets Current LiabilitiesFor Basket Wonders December 31, 2007,Shows a firms a
14、bility to cover its current liabilities with its current assets.,Balance Sheet Ratios,Liquidity Ratios,$1,195 $500,= 2.39,Liquidity Ratios,(2)Acid-Test (Quick)Current Assets - Inv Current LiabilitiesFor Basket Wonders December 31, 2007,Shows a firms ability to meet current liabilities with its most
15、liquid assets.,Balance Sheet Ratios,Liquidity Ratios,$1,195 - $696 $500,= 1.00,Summary of the Liquidity Ratio 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.,Ratio
16、BW Industry Current 2.39 2.15 Acid-Test 1.00 1.25,Summary of the Liquidity Trend Analyses,The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable. This indicates that inventories are a significant problem for BW.,The current ratio for
17、 BW has been rising at the same time the acid-test ratio has been declining.,2.Financial Leverage Ratios,(1)Debt-to-EquityTotal Debt Shareholders EquityFor Basket Wonders December 31, 2007,Shows the extent to which the firm is financed by debt.,Balance Sheet Ratios,Financial Leverage Ratios,$1,030 $
18、1,139,= .90,Financial Leverage Ratios,(2)Debt-to-Total-AssetsTotal Debt Total AssetsFor Basket Wonders December 31, 2007,Shows the percentage of the firms assets that are supported by debt financing.,Balance Sheet Ratios,Financial Leverage Ratios,$1,030 $2,169,= .47,3.Coverage Ratios,Interest Covera
19、geEBIT Interest ChargesFor Basket Wonders December 31, 2007,Indicates a firms ability to cover interest charges.,Income Statement Ratios,Coverage Ratios,$210 $59,= 3.56,Summary of the Coverage Trend Analysis,This indicates that low earnings (EBIT) may be a potential problem for BW. Note, we know tha
20、t debt levels are in line with the industry averages.,The interest coverage ratio for BW has been falling since 2005. It has been below industry averages for the past two years.,4.Activity Ratios,(1)Receivable TurnoverAnnual Net Credit Sales ReceivablesFor Basket Wonders December 31, 2007,Indicates
21、quality of receivables and how successful the firm is in its collections.,Income Statement / Balance Sheet Ratios,Activity Ratios,$2,211 $394,= 5.61,(Assume all sales are credit sales.),Activity Ratios,Avg Collection PeriodDays in the Year Receivable TurnoverFor Basket Wonders December 31, 2007,Aver
22、age number of days that receivables are outstanding. (or RT in days),Income Statement / Balance Sheet Ratios,Activity Ratios,365 5.61,= 65 days,Activity Ratios,(2)Payable Turnover (PT)Annual Credit Purchases Accounts PayableFor Basket Wonders December 31, 2007,Indicates the promptness of payment to
23、suppliers by the firm.,Income Statement / Balance Sheet Ratios,Activity Ratios,$1551 $94,= 16.5,(Assume annual credit purchases = $1,551.),Activity Ratios,PT in DaysDays in the Year Payable TurnoverFor Basket Wonders December 31, 2007,Average number of days that payables are outstanding.,Income Stat
24、ement / Balance Sheet Ratios,Activity Ratios,365 16.5,= 22.1 days,Activity Ratio Comparisons,BW Industry 22.1 46.7 25.4 51.1 43.5 48.5,Year 2007 2006 2005,Payable Turnover in Days,BW has improved the PT in Days. Is this good?,Activity Ratios,(3)Inventory TurnoverCost of Goods Sold InventoryFor Baske
25、t Wonders December 31, 2007,Indicates the effectiveness of the inventory management practices of the firm.,Income Statement / Balance Sheet Ratios,Activity Ratios,$1,599 $696,= 2.30,Activity Ratio Comparisons,BW Industry 2.30 3.45 2.44 3.76 2.64 3.69,Year 2007 2006 2005,Inventory Turnover Ratio,BW h
26、as a very poor inventory turnover ratio.,Activity Ratios,(4)Total Asset TurnoverNet Sales Total AssetsFor 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 $2,169,
27、= 1.02,5.Profitability Ratios,(1)Gross Profit MarginGross Profit Net SalesFor Basket Wonders December 31, 2007,Indicates the efficiency of operations and firm pricing policies.,Income Statement / Balance Sheet Ratios,Profitability Ratios,$612 $2,211,= .277,Profitability Ratios,(2)Net Profit MarginNe
28、t Profit after Taxes Net SalesFor Basket Wonders December 31, 2007,Indicates the firms profitability after taking account of all expenses and income taxes.,Income Statement / Balance Sheet Ratios,Profitability Ratios,$91 $2,211,= .041,Profitability Ratios,(3)Return on InvestmentNet Profit after Taxe
29、s Total AssetsFor Basket Wonders December 31, 2007,Indicates the profitability on the assets of the firm (after all expenses and taxes).,Income Statement / Balance Sheet Ratios,Profitability Ratios,$91 $2,160,= .042,Profitability Ratios,(4)Return on EquityNet Profit after Taxes Shareholders EquityFo
30、r Basket Wonders December 31, 2007,Indicates the profitability to the shareholders of the firm (after all expenses and taxes).,Income Statement / Balance Sheet Ratios,Profitability Ratios,$91 $1,139,= .08,Return on Investment and the Du Pont Approach,ROI2007 = .041 x 1.02 = .042 or 4.2% ROIIndustry
31、= .082 x 1.17 = .098 or 9.8%,ROI = Net profit margin XTotal asset turnover,Earning Power = Sales profitability XAsset efficiency,Return on Equity and the Du Pont Approach,ROE2007 = .041 x 1.02 x 1.90 = .080 ROEIndustry = .082 x 1.17 x 1.88 = .179,Return On Equity = Net profit margin XTotal asset tur
32、nover XEquity Multiplier,Equity Multiplier =,Total Assets,Shareholders Equity,Summary of the Profitability Trend Analyses,The profitability ratios for BW have ALL been falling since 2005. Each has been below the industry averages for the past three years. This indicates that COGS and administrative
33、costs may both be too high and a potential problem for BW. Note, this result is consistent with the low interest coverage ratio.,Summary 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 cos
34、ts may be too high.,.Common-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.,.Index Analyses,An analysis of percentage financial statements where all balance she
35、et 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.,Chapter 8,Overview of Working Capital Management, Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Cre
36、ated by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI,Overview of Working Capital Management,Working Capital Concepts Working Capital Issues Financing Current Assets: Short-Term and Long-Term Mix Combining Liability Structure and Current Asset Decisions,.Working Capital Concepts,Net Wo
37、rking Capital Current Assets - Current Liabilities. Gross Working Capital The firms investment in current assets. Working Capital Management The administration of the firms current assets and the financing needed to support current assets.,Significance of Working Capital Management,In a typical manu
38、facturing firm, current assets exceed one-half of total assets. Excessive levels can result in a substandard Return on Investment (ROI). Current liabilities are the principal source of external financing for small firms. Requires continuous, day-to-day managerial supervision. WCM affects the company
39、s risk, return, and share price.,.Working Capital Issues,Assumptions 50,000 maximum units of production Continuous production Three different policies for current asset levels are possible,Optimal Amount (Level) of Current Assets,0 25,000 50,000,OUTPUT (units),ASSET LEVEL ($),Current Assets,Policy C
40、,Policy A,Policy B,.Impact on Liquidity,Liquidity Analysis Policy LiquidityA HighB AverageC Low Greater current asset levels generate more liquidity; all other factors held constant.,Optimal Amount (Level) of Current Assets,0 25,000 50,000,OUTPUT (units),ASSET LEVEL ($),Current Assets,Policy C,Polic
41、y A,Policy B,.Impact on Expected Profitability,Return on Investment = Net Profit Total Assets Let Current Assets = (Cash + Rec. + Inv.) Return on Investment = Net Profit Current + Fixed Assets,Optimal Amount (Level) of Current Assets,0 25,000 50,000,OUTPUT (units),ASSET LEVEL ($),Current Assets,Poli
42、cy C,Policy A,Policy B,.Impact on Expected Profitability,Profitability Analysis Policy ProfitabilityA LowB AverageC High As current asset levels decline, total assets will decline and the ROI will rise.,Optimal Amount (Level) of Current Assets,0 25,000 50,000,OUTPUT (units),ASSET LEVEL ($),Current A
43、ssets,Policy C,Policy A,Policy B,.Impact on Risk,Decreasing cash reduces the firms ability to meet its financial obligations. More risk! Stricter credit policies reduce receivables and possibly lose sales and customers. More risk! Lower inventory levels increase stockouts and lost sales. More risk!,
44、Optimal Amount (Level) of Current Assets,0 25,000 50,000,OUTPUT (units),ASSET LEVEL ($),Current Assets,Policy C,Policy A,Policy B,Impact on Risk,Risk Analysis Policy RiskA LowB AverageC High Risk increases as the level of current assets are reduced.,Optimal Amount (Level) of Current Assets,0 25,000
45、50,000,OUTPUT (units),ASSET LEVEL ($),Current Assets,Policy C,Policy A,Policy B,Summary of the Optimal Amount of Current Assets,SUMMARY OF OPTIMAL CURRENT ASSET ANALYSIS Policy Liquidity Profitability Risk A High Low LowB Average Average AverageC Low High High,1. Profitability varies inversely with
46、liquidity.2. Profitability moves together with risk.(risk and return go hand in hand!),.Classifications of Working Capital,Time Permanent Temporary,Components Cash, marketable securities, receivables, and inventory,.Permanent Working Capital,The amount of current assets required to meet a firms long
47、-term minimum needs.,Permanent current assets,TIME,DOLLAR AMOUNT,.Temporary Working Capital,The amount of current assets that varies with seasonal requirements.,Permanent current assets,TIME,DOLLAR AMOUNT,Temporary current assets,.Financing Current Assets: Short-Term and Long-Term Mix,Spontaneous Financing: Trade credit, and other payables and accruals, that arise spontaneously in the firms day-to-day operations. Based on policies regarding payment for purchases, labor, taxes, and other expenses. We are concerned with managing non-spontaneous financing of assets.,
