accounting literacy for litigators and corporate counsel multnomah bar association october 29, 2015
TRANSCRIPT
Accounting Literacy for Litigators and Corporate
Counsel
Multnomah Bar Association
October 29, 2015
Jay Sickler is a CPA, and is accredited as a business valuation and financial forensics expert by the American Society of Appraisers (ASA) and the American Institute of CPAs (ABV and CFF).
His firm Cogence Group exclusively provides financial forensics and business valuation services to attorneys, corporations, and business owners.
Sarah Padfield is a CPA and a Principal with Delap, one of Portland’s largest local CPA firms.
She has over eleven years of experience in public accounting. She provides assurance services for private, closely held businesses of all sizes.
Timothy Snider is a partner at Stoel Rives and chairs its litigation practice group. His practice emphasizes complex business litigation.
Help you better understand “business scorekeeping”
Update you on new(er) disclosure requirements for financial reporting by public and private companies
Provide tools to challenge the financial picture presented
Goals of Today’s Session
Talk about when you need to call in an expert and how they can help early on
Discuss the types of information an expert needs and what might not be relevant
Raise awareness about information to be gleaned from a company’s financial statements
Goals of Today’s Session
Accounting Methods
Cash Basis (not according to Generally Accepted Accounting Principles)
Accrual Basis (GAAP) Other Basis (not GAAP)
Modified Cash Tax Basis
Managerial Accounting Internally prepared and used Customized
Accounting Methods
Cash Basis
Revenue Recorded when Cash Received
Expenses Recorded when Cash Paid Out
Not to be Confused with a Statement of Cash Flow
Accrual Basis
“Matching” revenue and expenses in same period
Recognize revenue when earned, not when received
Recognize expenses when incurred, not when paid
Follows “GAAP” Allows for comparability of businesses
Financial Statements Anatomy
Balance Sheet
Income Statement
Statements of Cash Flows
Notes to Financial Statements
All required to comply with GAAP
Basic Financial Statement Components
Balance Sheet
Snapshot of the financial health of a business at a particular point in time
|--------------------------------|--------------------------------|12/31/Y1 12/31/Y2 12/31/Y3
Apple, Inc.
Balance Sheets
ASSETS: Current assets:
Cash and cash equivalents $ 9,815 $ 11,261Short-term marketable securities 16,137 14,359Accounts receivable, less allowances of $53 and $55, respectively 5,369 5,510Inventories 776 1,051Deferred tax assets 2,014 1,636Vendor non-trade receivables 6,348 4,414Other current assets 4,529 3,447
Total current assets 44,988 41,678
Long-term marketable securities 55,618 25,391Property, plant and equipment, net 7,777 4,768Goodwill 896 741Acquired intangible assets, net 3,536 342Other assets 3,556 2,263
Total assets $ 116,371 $ 75,183
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities: Accounts payable $ 14,632 $ 12,015Accrued expenses 9,247 5,723Deferred revenue 4,091 2,984
Total current liabilities 27,970 20,722
Deferred revenue – non-current 1,686 1,139Other non-current liabilities 10,100 5,531
Total liabilities 39,756 27,392
Commitments and contingencies
Shareholders’ equity: Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively 13,331
10,668
Retained earnings 62,841 37,169Accumulated other comprehensive income/(loss) 443 (46.00)
Total shareholders’ equity 76,615 47,791 Total liabilities and shareholders’ equity $ 116,371 $ 75,183
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (In millions, except number of shares which are reflected in thousands)
APPLE INC
September 24, 2011
September 25, 2010
ASSETS: Current assets:
Cash and cash equivalents $ 9,815 $ 11,261Short-term marketable securities 16,137 14,359Accounts receivable, less allowances of $53 and $55, respectively 5,369 5,510Inventories 776 1,051Deferred tax assets 2,014 1,636Vendor non-trade receivables 6,348 4,414Other current assets 4,529 3,447
Total current assets 44,988 41,678
Long-term marketable securities 55,618 25,391Property, plant and equipment, net 7,777 4,768Goodwill 896 741Acquired intangible assets, net 3,536 342Other assets 3,556 2,263
Total assets $ 116,371 $ 75,183
September 24, 2011
September 25, 2010
Apple, Inc.
ASSETS: Current assets:
Cash and cash equivalents $ 9,815 $ 11,261Short-term marketable securities 16,137 14,359Accounts receivable, less allowances of $53 and $55, respectively 5,369 5,510Inventories 776 1,051Deferred tax assets 2,014 1,636Vendor non-trade receivables 6,348 4,414Other current assets 4,529 3,447
Total current assets 44,988 41,678
Long-term marketable securities 55,618 25,391Property, plant and equipment, net 7,777 4,768Goodwill 896 741Acquired intangible assets, net 3,536 342Other assets 3,556 2,263
Total assets $ 116,371 $ 75,183
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities: Accounts payable $ 14,632 $ 12,015Accrued expenses 9,247 5,723Deferred revenue 4,091 2,984
Total current liabilities 27,970 20,722
Deferred revenue – non-current 1,686 1,139Other non-current liabilities 10,100 5,531
Total liabilities 39,756 27,392
Commitments and contingencies
Shareholders’ equity: Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively 13,331
10,668
Retained earnings 62,841 37,169Accumulated other comprehensive income/(loss) 443 (46.00)
Total shareholders’ equity 76,615 47,791 Total liabilities and shareholders’ equity $ 116,371 $ 75,183
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (In millions, except number of shares which are reflected in thousands)
APPLE INC
September 24, 2011
September 25, 2010
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities: Accounts payable $ 14,632 $ 12,015Accrued expenses 9,247 5,723Deferred revenue 4,091 2,984
Total current liabilities 27,970 20,722
Deferred revenue – non-current 1,686 1,139Other non-current liabilities 10,100 5,531
Total liabilities 39,756 27,392
Commitments and contingencies
Shareholders’ equity: Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively 13,331
10,668
Retained earnings 62,841 37,169Accumulated other comprehensive income/(loss) 443 (46.00)
Total shareholders’ equity 76,615 47,791 Total liabilities and shareholders’ equity $ 116,371 $ 75,183
See accompanying Notes to Consolidated Financial Statements.
September 24, 2011
September 25, 2010
Apple, Inc.
Assets = Liabilities + Equity
ASSETS: Current assets:
Cash and cash equivalents $ 9,815 $ 11,261Short-term marketable securities 16,137 14,359Accounts receivable, less allowances of $53 and $55, respectively 5,369 5,510Inventories 776 1,051Deferred tax assets 2,014 1,636Vendor non-trade receivables 6,348 4,414Other current assets 4,529 3,447
Total current assets 44,988 41,678
Long-term marketable securities 55,618 25,391Property, plant and equipment, net 7,777 4,768Goodwill 896 741Acquired intangible assets, net 3,536 342Other assets 3,556 2,263
Total assets $ 116,371 $ 75,183
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities: Accounts payable $ 14,632 $ 12,015Accrued expenses 9,247 5,723Deferred revenue 4,091 2,984
Total current liabilities 27,970 20,722
Deferred revenue – non-current 1,686 1,139Other non-current liabilities 10,100 5,531
Total liabilities 39,756 27,392
Commitments and contingencies
Shareholders’ equity: Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively 13,331
10,668
Retained earnings 62,841 37,169Accumulated other comprehensive income/(loss) 443 (46.00)
Total shareholders’ equity 76,615 47,791 Total liabilities and shareholders’ equity $ 116,371 $ 75,183
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (In millions, except number of shares which are reflected in thousands)
APPLE INC
September 24, 2011
September 25, 2010
Total liabilities and shareholders’ equity
$ 116,371
$ 75,183
Total assets $ 116,371
$ 75,183
Income Statement
Business activity from one point in time through another point in time.
Measures operating performance and profitability of business.
Statements of Operations/Income Statements
Apple, Inc.
Three years ended September 24, 2011 2011 2010 2009
Net sales $ 108,249 $ 65,225 $ 42,905Cost of sales 64,431 39,541 25,683
Gross margin 43,818 25,684 17,222 Operating expenses:
Research and development 2,429 1,782 1,333Selling, general and administrative 7,599 5,517 4,149
Total operating expenses 10,028 7,299 5,482 Operating income 33,790 18,385 11,740Other income and expense 415 155 326 Income before provision for income taxes 34,205 18,540 12,066Provision for income taxes 8,283 4,527 3,831 Net income $ 25,922 $ 14,013 $ 8,235 Earnings per common share:
Basic $ 28.05 $ 15.41 $ 9.22Diluted $ 27.68 $ 15.15 $ 9.08
Shares used in computing earnings per share: Basic 924,258 909,461 893,016Diluted 936,645 924,712 907,005
CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except number of shares which are reflected in thousands and per share amounts)
See accompanying Notes to Consolidated Financial Statements.
APPLE INC
Statements of Operations/Income Statements
Apple, Inc.
Three years ended September 24, 2011 2011 2010 2009
Net sales $ 108,249 $ 65,225 $ 42,905Cost of sales 64,431 39,541 25,683
Gross margin 43,818 25,684 17,222 Operating expenses:
Research and development 2,429 1,782 1,333Selling, general and administrative 7,599 5,517 4,149
Total operating expenses 10,028 7,299 5,482 Operating income 33,790 18,385 11,740Other income and expense 415 155 326 Income before provision for income taxes 34,205 18,540 12,066Provision for income taxes 8,283 4,527 3,831 Net income $ 25,922 $ 14,013 $ 8,235 Earnings per common share:
Basic $ 28.05 $ 15.41 $ 9.22Diluted $ 27.68 $ 15.15 $ 9.08
Shares used in computing earnings per share: Basic 924,258 909,461 893,016Diluted 936,645 924,712 907,005
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
See accompanying Notes to Consolidated Financial Statements.
APPLE INC
Three years ended September 24, 2011 2011 2010 2009
Net sales $ 108,249 $ 65,225 $ 42,905Cost of sales 64,431 39,541 25,683
Gross margin 43,818 25,684 17,222 Operating expenses:
Research and development 2,429 1,782 1,333Selling, general and administrative 7,599 5,517 4,149
Total operating expenses 10,028 7,299 5,482 Operating income 33,790 18,385 11,740Other income and expense 415 155 326 Income before provision for income taxes 34,205 18,540 12,066Provision for income taxes 8,283 4,527 3,831 Net income $ 25,922 $ 14,013 $ 8,235
Operating Activities Involves the cash effects of transactions that
enter into the determination of net income Investing Activities
Involves the cash effects of making and collecting loans, acquiring and disposing of investments, including property, plant, and equipment
Financing Activities Involves the cash effects of liability and
owners’ equity section, including borrowing and repaying money
Statements of Cash Flows
Statements of Cash Flows
Three years ended September 24, 2011
Cash and cash equivalents, beginning of the year $ 11,261 $ 5,263 $ 11,875
Operating activities: Net income 25,922 14,013 8,235 Adjustments to reconcile net income to cash generated by operating activities:
Depreciation, amortization and accretion 1,814 1,027 734 Share-based compensation expense 1,168 879 710 Deferred income tax expense 2,868 1,440 1,040
Changes in operating assets and liabilities: Accounts receivable, net 143 (2,142) (939)Inventories 275 (596) ) 54 Vendor non-trade receivables (1,934) (2,718) 586 Other current and non-current assets (1,391) (1,610) (713)Accounts payable 2,515 6,307 92 Deferred revenue 1,654 1,217 521 Other current and non-current liabilities 4,495 778 (161)
Cash generated by operating activities 37,529 18,595 10,159
CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
APPLE INC
2011 2010 2009
Statements of Cash Flows
Investing activities: Purchases of marketable securities (102,317) ) (57,793) (46,724)Proceeds from maturities of marketable securities 20,437 24,930 19,790 Proceeds from sales of marketable securities 49,416 21,788 10,888 Payments made in connection with business acquisitions, net of cash acquired (244) ) (638 - Payments for acquisition of property, plant and equipment (4,260) ) (2,005) (1,144)Payments for acquisition of intangible assets (3,192) ) (116) (69)Other (259) ) (20) (175)
Cash used in investing activities (40,419) ) (13,854) ) (17,434)
Statements of Cash Flows
Financing activities: Proceeds from issuance of common stock 831 912 475 Excess tax benefits from equity awards 1,133 751 270 Taxes paid related to net share settlement of equity awards (520) ) (406) ) (82)
Cash generated by financing activities 1,444 1,257 663
(Decrease)/increase in cash and cash equivalents (1,446) ) 5,998 (6,612)
Cash and cash equivalents, end of the year $ 9,815 $ 11,261 $ 5,263
Supplemental cash flow disclosure: Cash paid for income taxes, net $ 3,338 $ 2,697 $ 2,997
See accompanying Notes to Consolidated Financial Statements.
Significant Accounting Policies Inventory Income Taxes Fixed assets & Long-Lived Assets Intangibles Marketable Securities Debt Related Party Transactions Subsequent Events Commitments and Contingencies
Notes to Financial Statement
• Critical Accounting Policies and Estimates (from Apple Inc FS)The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements in this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Notes to Financial Statement
• Inventory Valuation and Inventory Purchase CommitmentsThe Company must order components for its products and build inventory in advance of product shipments. The Company records a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review of inventory each fiscal quarter that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. If future demand or market conditions for the Company’s products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of component inventory, the Company may be required to record additional write-downs, which would negatively affect its results of operations in the period when the write-downs were recorded.
Notes to Financial Statement
• Inventory Valuation and Inventory Purchase Commitments (Continued)The Company records accruals for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. These commitments typically cover the Company’s requirements for periods up to 150 days. If there is an abrupt and substantial decline in demand for one or more of the Company’s products or an unanticipated change in technological requirements for any of the Company’s products, the Company may be required to record additional accruals for cancellation fees that would negatively affect its results of operations in the period when the cancellation fees are identified and recorded.
Notes to Financial Statement
• Cash Equivalents and Marketable SecuritiesAll highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable debt and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. The Company classifies its marketable equity securities, including mutual funds, as either short-term or long-term based on the nature of each security and its availability for use in current operations. The Company’s marketable debt and equity securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method.
Notes to Financial Statement
Other Reports
Corporate Tax Returns Not GAAP Show adjustments to arrive at tax (IRS) net
income SEC Reports – Mostly follow GAAP, some
special rules Form 10K
Public companies required to have an annual audit
Form 10Q Reviewed quarterly financial statements
Recent GAAP Updates
Business Combinations Determine business vs. asset
acquisition All assets and liabilities acquired are
valued at fair value and any residual payment is considered goodwill (or negative goodwill)
Push down accounting is optional
Recent GAAP Updates
Fair value What is the price to sell an asset or transfer a
liability Certain items are required to be measured at
fair value (business combinations, loans, equity and debt securities)
Management has a fair value option for derivatives and financial instruments
Fair value is more common in international accounting standards
Recent GAAP Updates
GAAP current events International Financial Reporting Standards
(IFRS) – US GAAP is not likely to be converging with IFRS Certain GAAP is being changed to
conform to IFRS US Firms can issue IFRS statements
Leases – Final standard expected to be issued Q4 of 2015 Eliminate operating leases
Recent GAAP Updates
Going Concern Old rule – substantial doubt about ability to
continue for 1 year after financial statement date
New rule – substantial doubt about ability to continue for 1 year after financial statements issued
Managements plans need to be implemented to be considered, look for enhanced disclosures
Recent GAAP Updates
Miscellaneous changes Discontinued operations No more development change entities Extraordinary items Debt issuance costs Inventory
Recent GAAP Updates
Private Company changes Still GAAP, applicable for non-public
companies Goodwill – Can amortize over 10 years,
no impairment testing Interest rate swaps Variable interest entities in leasing
arrangements Intangible assets in business
combinations
Recent GAAP Updates
Revenue Recognition changes Currently revenue recorded when earned
and realizable. This varies by industry. New – Recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Recent GAAP Updates
Revenue Recognition changes (Continued) Impact will vary by industry
Example: Direct to consumer, smaller impact compared to software companies, larger impact
Effective after 12/15/2017 for public companies and 12/15/2018 for non-public
Determining causation. Did the defendant’s wrongful conduct
produce the damage suffered by the plaintiff?
Expert testimony can help trier of fact decide whether plaintiff has proved the causal link.
More than correlation must be established.
When to call in an expert
Information gathering in discovery. Attorneys rarely know what financial
information is most relevant. Discovery requests become unreasonably
burdensome. Expert can assist in pinpointing the critical
financial data, using terms of art. Most importantly the expert can assess the
quality of the information received so that a follow-up request can be made.
When to call in an expert
Assessing needed financial discovery. If plaintiff suffered economic loss, what
do the financial statements tell you? Are there CPA prepared financial
statements, internal financial statements, tax returns, general ledger, budgets, forecasts?
Expert should always be on board to assist in discovery request/interrogatories.
When to call in an expert
Start with summary financial statements before getting too much detail.
Audited or reviewed financials better than internal financials.
Most economic damage analyses need more income and expense detail than is on a typical income statement.
What information is helpful?
Financial StatementsLevels of Assurance
Internal Compilation Review Audit0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
The attached report, if any, is important to read and understand the level of service provided.
Effective in 2015 CPAs can prepare statements but don’t need to issue a report – called the preparation standard.
Levels of Assurance
Detailed registers and many accounting reports used for internal management.
Check copies unless in certain types of litigation where tracing is necessary.
Other basic accounting records sent in discovery to bog you down in paper.
What information is NOT helpful?
Analysis of Financial Statements
Profitability Measures
EBITDA is earnings before interest, tax, depreciation and amortization. Truest measure of operating
performance. Next best measure is EBIT, earnings
before interest and tax.
Common Sizing
Ratio Analysis
Trend Analysis
Variable vs. Fixed Cost Analysis
Typical Analysis Measures
Each line item is expressed as a percentage of the total
Balance Sheet As a percentage of total assets
Income Statement As a percentage of total sales
Common Sizing
Common Sized Analysis
Gross Margin (Gross profit divided by Sales)
0%
10%
20%
30%
40%
50%
2009 2010 2011
Other Profitability Measures
Return on Equity (“ROE”)
Net Income / Equity
Return on Assets (“ROA”)
Net Income / Total Assets
Price to Earnings (“PE”)
Market Price of Stock to Net Income
Liquidity
Current Ratio =
Current Assets / Current Liabilities
Quick or “Acid Test” Ratio =
Cash + Accounts Receivable + Marketable
Securities / Current Liabilities
Ratio Analysis
Profitability Ratio Measures degree of profitability
Liquidity Ratio Measures short-term ability to pay
obligations as they come due Coverage Ratio
Measures the degree of protection for long-term creditors and investors
Activity Ratio Measures the company’s efficient use of
assets
Annual Growth Rates
Historical Industry
2007 2008 2009 2010 2011
Annual Growth Rates
Revenue 30.5% 19.9% -11.7% 11.8% 11.5% 4.2%
Gross Profit 63.3% 0.3% -9.6% 19.9% 15.4% 4.2%
Operating Costs -15.8% -4.6% 30.7% 22.6% 6.5% 4.2%
EBITDA 474.7% 4.0% -37.9% 16.2% 44.1% 4.4%
EBIT 1532.0% 4.0% -40.0% 28.4% 90.1% 3.7%
Total Assets -8.0% 120.3% -46.5% 77.0% 17.7% 6.2%
Equity / Member's Capital 2.4% 313.4% -42.5% 77.0% 44.1% 10.9%
CAGR
Profitability
Historical Industry
2007 2008 2009 2010 2011
Profitability
Gross Profit % [Gross Profit / Revenue] 51.5% 64.5% 53.9% 55.2% 59.2% 56.9% 0.0%
EBITDA % [EBITDA / Revenue] 8.3% 36.6% 31.7% 22.3% 23.2% 24.4% 6.5%
EBIT % [EBIT / Revenue] 2.7% 34.3% 29.7% 20.2% 23.2% 22.0% 5.0%
EBT% [EBT / Revenue] 2.9% 34.3% 29.7% 20.2% 23.2% 22.1% 4.8%
Net Income % [Net Income / Revenue] 2.9% 34.3% 29.7% 20.2% 23.2% 22.1% 3.0%
Effective Tax Rate [Tax/EBT] 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Owners Comp as % of Revenue [Owners Comp / Revenue] N/A N/A N/A N/A N/A 7.6%
Return on Assets [Net Income / Assets] 11.3% 192.3% 90.7% 101.6% 73.8% 93.9% 8.0%
Return on Equity [Net Income / Book Equity] 25.4% 389.0% 97.7% 101.9% 74.0% 137.6% 16.67%
Return on Invested Capital [EBITDAx(1-tax) / Book IC] 76.3% 228.7% 89.6% 97.6% 73.8% 113.2%
Average
Liquidity and Efficiency
Historical Industry
2007 2008 2009 2010 2011
Liquidity
Current Ratio [Cur. Assets / Cur. Liab.] 3.4 1.9 13.7 391.2 356.5 153.4 1.7
Quick Ratio [(Cash + AR) / Cur. Liab] 3.2 1.7 10.5 315.4 296.6 125.5 1.3
Cash as % of Assets [Cash / Assets] 44.9% 2.1% 26.2% 28.7% 38.1% 28.0% 18.1%
Efficiency
Days Sales Outstanding (DSO) [AR / (Revenue/365)] 42.1 55.7 59.7 36.6 49.9 48.8 43.2
Working Capital as % of Sales [NWC / Revenue] 6.0% 8.0% 21.5% 13.8% 18.8% 13.6%
(excluding cash and cur. portion of LT debt)
Asset Turnover [Revenue / Assets] 3.9 5.6 3.0 5.0 3.2 4.2 2.67
Fixed Asset Turnover [Revenue / Fixed Assets] 150.4 235.6 281.2 293.9 164.0 225.0 12.1
Leverage
Historical Industry
2007 2008 2009 2010 2011
Leverage
Financial Leverage [Assets / Book Equity] 2.3 2.0 1.1 1.0 1.0 1.5 2.1
Debt / Equity [Total Debt / Book Equity] 0.5 - - - - 0.1 0.37
Interest Coverage Ratio [EBIT / Interest Exp.] N/A 1,950.2 1,461.3 N/A N/A 1,705.8 19.6
Debt as % of Assets [Debt / Assets] 21.9% 0.0% 0.0% 0.0% 0.0% 4.4% 17.6%
DuPont Formula
Net Profit Margin 2.9% 34.3% 29.7% 20.2% 23.2% 22.1% 3.0%
x Asset Turnover 3.9 5.6 3.0 5.0 3.2 4.2 2.7
=Return on Assets 11.3% 192.3% 90.7% 101.6% 73.8% 93.9% 8.0%
x Financial Leverage 2.3 2.0 1.1 1.0 1.0 1.5 2.1
=Return on Equity 25.4% 389.0% 97.7% 101.9% 74.0% 137.6% 16.6%
Footnotes:
Industry Data based on 5-Year Industry Report
Trend Analysis – Year to Year
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Gross Margin Sales
2009 2010 2011
Variable vs. Fixed Cost Analysis
Variable costs fluctuate in direct proportion to changes in sales/revenue
Fixed costs do not tend to move with changes in sales/revenue
Expenses can also be semi-variable or exhibit a step function
Variable Costs
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
2009 2010 2011
Sales
ProductionParts
Fixed Costs
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
2009 2010 2011
Sales
Rent
Semi-Variable Cost
Costs that exhibit both fixed and variable elements.
For example warehouse labor Permanent labor pool Temporary labor pool
Semi-Variable Cost
$-
$1,000,000
$2,000,000
2009 2010 2011
Warehouse labor
Sales
Stepped Costs
Costs that remain fixed up to a certain level of production, then increase when production reaches capacity.
For example factory rent up to point where expansion needs to take place.
Stepped Costs
$-
$1,000,000
$2,000,000
2009 2010 2011
Factory Rent
Sales
Quality of financial reporting varies across companies and scope of reporting.
Understanding your company requires analysis over time and comparison to other companies/industry.
Use ratio tools to dig below the surface and illuminate strengths and weaknesses.
What Did We Learn?
Questions??