Chapter 14Suggestions for Case Analysis

PowerPoint SlidesAnthony F. ChelteWestern New England College

Case AnalysisResearch:Go beyond information in the caseResearch environmental settingCheck decision date of caseUse information servicesCOMPUSTAT, Compact Disclosure, CD/Internationalwww.hoovers.comwww.sec.gov

Case AnalysisResearch:Annual reports10K formIncome statementsBalance sheetsCash flow statementsEconomic conditionsIndustry information

Case AnalysisResources for Case Library Research:Company Information:Moodys Manuals on InvestmentStandard & Poors Register of Corporations, Directors, and ExecutivesValue Lines Investment SurveyFindex: The Directory of Market Research Reports, Studies and Surveys

Case AnalysisResources for Case Library Research:Economic Information:Business Cycle DevelopmentU.S. Census BureauCurrent Business ReportsEconomic IndicatorsLong-Term Economic GrowthMonthly Labor ReviewU.S. Industrial OutlookOverseas Business Reports

Case AnalysisResources for Case Library Research:Industry Information:Business WeekFortuneIndustry SurveyIndustry WeekForbesInc.

Case AnalysisResources for Case Library Research:Directory and Index Information:Business Periodical IndexDirectory of National Trade AssociationsEncyclopedia of AssociationsFunk and Scotts Index of Corporations and IndustriesThomass Register of American ManufacturersWall Street Journal Index

Case AnalysisResources for Case Library Research:Ratio Analysis Information:Almanac of Business and Industrial Financial RatiosAnnual Statement StudiesDuns ReviewIndustry Norms and Key Business Ratios

Case AnalysisResources for Case Library Research:Online Information:www.hoovers.comwww.sec.govwww.pathfinder.comwww.dbisna.com/dnb/dnbhome.htmwww.fuld.comwww.economist.comwww.w100.comwww.bloomberg.com

Case AnalysisFinancial Analysis:Ratio analysisLiquidity ratiosProfitability ratiosActivity ratiosLeverage ratios

Financial Ratio Analysis Liquidity1.Liquidity RatiosCurrent ratio Quick (acid test) ratio Inventory to net working capital Cash ratio

How FormulaExpressedMeaningCurrent assetsCurrent liabilitiesDecimal Decimal Decimal Decimal

A short-term indicator of the companys ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities.Measures the companys ability to pay off its short-term obligations from current assets, excluding inventories.A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory.Measures the extent to which the companys capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets.Current assets InventoryCurrent liabilitiesInventoryCurrent assets Current liabilitiesCash + Cash equivalentsCurrent liabilities

Financial Ratio Analysis Profitability2. Profitability RatiosNet profit margin Gross profit margin Return on investment (ROI)

Return on equity (ROE) Earnings per share (EPS)How FormulaExpressedMeaningNet profit after taxesNet salesPercentage Percentage Percentage Percentage Dollars per shareShows how much after-tax profits are generated by each dollar of sales.Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit.Measures the rate of return on the total assets utilized in the company; a measure of managements efficiency, it shows the return on all the assets under its control regardless of source of financing.Measures the rate of return on the book value of shareholders total investment in the company.Shows the after-tax earnings generated for each share of common stock.Sales Cost of goods soldNet salesNet profit after taxesShareholders equityNet profit after taxes preferred stock dividendsAverage number of common sharesNet profit after taxesTotal assets

Financial Ratio Analysis Activity3. Activity RatiosInventory turnover Days of inventory Net working capital turnoverAsset turnover Fixed asset turnover Average collection period Accounts receivable turnoverAccounts payable periodDays of cashHow FormulaExpressedMeaningNet salesInventoryDecimal Days Decimal Decimal Decimal Days Decimal Days Days

Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year.Measures the number of one days worth of inventory that a company has on hand at any given time.Measures how effectively the net working capital is used to generate sales.Measures the utilization of all the companys assets; measures how many sales are generated by each dollar of assets.Measures the utilization of the companys fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets.Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers.Indicates the number of times that accounts receivable are cycled during the period (usually a year).Indicates the average length of time in days that the company takes to pay its credit purchases.Indicates the number of days of cash on hand, at present sales levels.InventoryCost of goods sold 365Net salesNet working capitalSalesTotal assetsSalesFixed assetsAccounts receivableSales for year 365Annual credit salesAccounts receivableAccounts payablePurchases for year 365CashNet sales for year 365

Financial Ratio Analysis Leverage4. Leverage RatiosDebt to asset ratio Debt to equity ratio Long-term debt to capital structure Times interest earned Coverage of fixed charges Current liabilities to equity

How FormulaExpressedMeaningTotal debtTotal assetsPercentage Percentage Percentage Decimal Decimal PercentageMeasures the extent to which borrowed funds have been used to finance the companys assets. Measures the funds provided by creditors versus the funds provided by owners. Measures the long-term component of capital structure. Indicates the ability of the company to meet its annual interest costs. A measure of the companys ability to meet all of its fixed-charge obligations. Measures the short-term financing portion versus that provided by owners.Total debtShareholders equityLong-term debtShareholders equityProfit before taxes + Interest charges + Lease chargesInterest charges + Lease obligationsProfit before taxes + Interest chargesInterest chargesCurrent liabilitiesShareholders equity

Financial Ratio Analysis Other5.Other RatiosPrice/earning ratio Dividend payout ratio Dividend yield on common stock

How FormulaExpressedMeaningMarket price per shareEarnings per shareDecimal Percentage Percentage

Shows the current markets evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings. Indicates the percentage of profit that is paid out as dividends. Indicates the dividend rate of return to common shareholders at the current market price.Annual dividends per shareAnnual earnings per shareAnnual dividends per shareCurrent market price per shareNote: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, for his definitions of these ratios.

Case AnalysisAnalyzing Financial Statements:Scrutinize historical statementsCompare historical statements over timeCalculate changes in categories from year to yearDetermine the change as a percentageAdjust for inflation

Case AnalysisCommon Size Statements:Income statements and balance sheets in which the dollar figures have been converted into percentages.

Altmans Bankruptcy FormulaZ =1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5wherex1 =Working capital divided by total assets.x2 =Retained earnings divided by total assets.x3 =Earnings before interest and taxes divided by total assets.x4 =Market value of equity divided by total liabilities.x5 =Sales divided by total assets. Z =Overall index of corporate fiscal health.

Index of Sustainable Growthg*= [ p (1 D) (1 + L)] / [T P (1 D) (1+L)]whereP = Net profit before taxes/net sales x 100D = Target dividends/profit after taxL = Total liabilities/net worthT = Total assets/net sales x 100

Case AnalysisOperating cash flow:Amount of money generated by a company before the cost of financing and taxes.Net income + depletion, amortization, interest expense, and income tax expense

Case AnalysisEconomic Measures:Constant dollarsDollars adjusted for inflation to make them comparable over various years.CPIPrime interest rateRate of interest banks charge on their lowest risk loans.Gross Domestic Product (GDP)Total output of goods and services within a countrys borders.

Strategic Audit Worksheet: Part 1

Strategic Audit Heading

Analysis

Comments

(+) Factors

(-) Factors

I. Current Situation

A. Past Corporate Performance Indexes

B. Strategic Posture

Current Mission

Current Objectives

Current Strategies

Current Policies

SWOT Analysis Begins:

II. Corporate Governance

A. Board of Directors

B. Top Management

III. External Environment (EFAS):

Opportunities and Threats(SWOT)

A. Societal Environment

B. Task Environment Industry Analysis

IV. Internal Environment (IFAS):

Strengths and Weaknesses(SWOT)

A. Corporate Structure

B. Corporate Culture

C. Corporate Resources

Strategic Audit Worksheet: Part 2

Strategic Audit Heading

Analysis

Comments

(+) Factors

(-) Factors

1. Marketing

2. Finance

3. Research and Development

4. Operations and Logistics

5. Human Resources

6. Information Systems

V. Analysis of Strategic Factors (SFAS)

A. Key Internal and External

Strategic Factors (SWOT)

B. Review of Mission and Objectives

SWOT Analysis Ends. Recommendation Begins:

VI. Alternatives and Recommendations

A. Strategic Alternatives

B. Recommended Strategy

VII. Implementation

VIII. Evaluation and Control

Convert the following two years of income statements from the Maytag Corporation into common-size statements. The dollar figures are in thousands. What does converting to a common size reveal?1992%1991%Net sales$3,041,223$2,970,626Cost of sales2,339,4062,254,221Gross profits701,817716,405Selling, general, and admin. 528,250 524,898 expensesReorganization expenses95,000Operating income78,567191,507 Interest expense(75,004)(75,159)Othernet3,9837,069Income before taxes and accounting changes7,546123,417Income taxes(15,900)(44,400)Income beforeaccounting changes(8,354)79,017Effects of accounting changes for post-retirement benefits(307,000)Net income (loss)$(315,354)$79,017

Case AnalysisCase Analysis Method:Read caseRead case with strategic auditDo outside researchBegin SWOT analysisEFASIFAS

Case AnalysisCase Analysis Method:Write Strategic Audit Parts I IVWrite Strategic AuditPart V SFAS

Case AnalysisWrite Strategic Audit Part VIAlternativesRecommendationsWrite Strategic AuditPart VIIImplementationWrite Strategic AuditPart VIIIEvaluation & ControlProof & Fine-Tune AuditFinal Draft