fin2004 session 2 [compatibility mode]
TRANSCRIPT
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FINANCE
FIN2004 Lecture 2: Financial Statement Analysis
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Example: Accounting FraudSatyam Scandal Needs Fast Probe as Stocks Slide
by Subramaniam Sharma
Jan. 9, 2009 (Bloomberg) -- India should actquickly to shore up investor confidence after
an alleged accounting fraud at SatyamComputer Services Ltd triggered a plunge instocks, a former regulator and executive said.
More than two days after chairman Ramalinga Raju claimedhed padded Satyams books by $1 billion, the companysauditors and interim management have yet to confirm any
irregularities.
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Example: Accounting FraudMadoff Scandal - Investors Left With $21.2 Billion In Cash
Losses We all know that Bernie will spend the rest of his life
in prison for orchestrating perhaps the biggestinvestment scam of all time, but his accountants andaides helped him do the dirty work. David Friehling,
Madoff's accountant, plead guilty last year to anumber of charges that he issued "rubber stamp"audits.
March 13, 2010: Huffingtonpost 2
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Example: Accounting Fraud WorldCom, the second-largest long-distance phone company in
the US, was found guilty of accounting fraud. The basis of thisfraud was very similar to that of Enron in that it used window-
dressing to inflate profit. However WorldCom's major sham was
that they disguised $3.8 billion in expenses over 15 months.
operating costs like basic network maintenance and line-costs
were booked as capital investments .
Q. How does capitalizing operating costs affect financial ratios?
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Financial Statements and the AnnualReport
An annual report is a report issued annually by acorporation to its stockholders. It contains basicfinancial statements as well as managements analysis ofthe firms past operations and future prospects.
Example: Berkshire Hathaways website: visit
www.berkshirehathaway.com for its annual reports forthe past decade.
In general, see also www.annualreportservice.com
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The Annual Report1. Balance sheet provides a snapshot of a firms financial
position at one point in time.
2. Income statement summarizes a firms revenues andexpenses over a given period of time .
3. Statement of retained earnings shows how much ofthe firms earnings were retained , rather than paid out as
dividends .4. Statement of cash flows reports the impact of a firms
activities on cash flows over a given period of time.
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Balance Sheet CharacteristicsASSETS = LIABILITIES + EQUITY
1. Resources must equal Claims
2. Order of Listing Highest to Lowest Liquidity3. Valuing of Items - Generally at original cost
(also known as Historical Cost) Exceptions: Marketable Securities and
Inventories
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Sample Balance Sheet
Assets LiabilitiesCash & Equivalents 3,171 Accounts Payable 313,286
Accounts Receivable 1,095,118 Notes Payable 227,848Inventory 388,947 Other CL 1,239,651
Other CA 314,454 Total CL 1,780,785
Total CA 1,801,690 LT Debt 1,389,615
Net FA 3,129,754 S/H EquityCommon Stock Retained Earnings
963,841797,203
Total Assets 4,931,444 Total Liab. & Equity 4,931,444
December 31, 20XX Numbers in thousands ($000s)
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Book Values and Market Values
Market Values are determined by current trading values in the market
NOTE: Market Value of Shareholders Equity = MarketCapitalization = Share Price x Number of Outstanding Shares
EXAMPLE: Market Value vs Book Value
According to GAAP, your firm has equity worth $6 billion, debt worth
$4 billion, assets worth $10 billion. The market values your firms 100million shares at $75 per share and the debt at $4 billion. What is themarket value of your assets?
Book Values (historical costs less accumulated deprecation) aredetermined by GAAP*
*Generally Accepted Accounting Principles
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Example: Market Value vs. Book Value
Market Value Balance Sheet
Assets = $11.5 bil = Debt = $4 bilEquity = $7.5 bil
Answer : Since (Assets = Liabilities + Equity), your assets
must have a market value of $11.5 billion.
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Enterprise Value The enterprise value of a firm assesses the value of the
underlying business assets (however financed), and separatefrom the value of any non-operating cash (i.e., excesscash) and marketable securities that the firm may have.
Generally,
In theory, the cost of a company if someone were to acquireit.
Enterprise Value = Market Value of Equity + Debt
Cash
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Example: Computing Enterprise Value Problem : In October 2007, H.J. Heinz Co. (HNZ) had a share priceof $46.78 , 319.1 million shares outstanding, a market-to-book ratio
of 8.00 , a book debt-equity ratio of 2.62 , and cash of $576 million.What was Heinzs market capitalization? What was its enterprisevalue?
Share Price $46.78
Shares outstanding 319.1 million
Market-to-book 8.00
Cash $576 million
Debt-to-equity (book) 2.62
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Heinz had a market capitalization of _____ shares x$___/share = $_______
Since Heinzs market-to-book ratio (= market value of equity / book value of equity) = 8.00
8.00 = $14.93 billion / book equitythen book equity =$ ______
Given that the book equity was $_____ and the book debt-to-equity ratio was 2.62 , the total value of Heinzs debt was $_____
Thus enterprise value was _____ + _____ - _____ = ______
Example: Computing Enterprise Value
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Sample Income Statement
Revenues $4,335,491
Cost of Goods Sold 1,762,721Operating Expenses 1,390,262
Depreciation 362,325
EBIT $820,183
Interest Expense 52,841
Taxable Income $767,342Taxes 295,426
Net Income $471,916
For Year Ending December 31, 20XX Numbers in thousands ($000s)
Shows (i) revenues , (ii) expenses and taxes associated with thoserevenues for some financial period, typically a month, a quarter or a year
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Retained Earnings, beginning of year 720,807
Add: Net Income 471,916
1,192,723
Less: Dividends -395,520
Retained Earnings, end of year 797,203
Numbers in thousands ($000s)
Sample Statement of Retained Earnings
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Basic Stock Concepts Nature/Composition of Contributed Capital
Authorized Capital Stock # shares can issue legally
Issued Capital Stock Unissued Capital Stock # shares issued to outsiders # shares not issued to outsiders
Outstanding Capital Stock Treasury Stock # shares held by outsiders # shares bought back
& held by company
.
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Profits vs. Cash FlowsDifferences Profits subtract depreciation (a non-cash expense)
Profits ignore cash expenditures on new fixed assets
(the expense is capitalized) Profits record income and expenses at the time of sales,
not when the cash exchanges actually occur
Profits do not consider changes in working capital
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The Importance of Cash Flows Cash is King: firms generate cash and they spend it .
Sources of cash (activities that bring in cash): decreases in assets (other than cash)
increases in equity and liabilities.
Uses of cash (activities that involve cash outflows):
increases in assets (other than cash)
decreases in equity & liabilities.
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Statement of Cash Flows This accounting statement summarizes the sources and
uses of cash over the period under consideration
Changes divided into 3 major categories:
1. Operating Activities includes net income and
changes in most current accounts (A/P A/R Inv)2. Investment Activities includes changes in fixed
assets
3. Financing Activities includes changes in notes payable, long-term debt and equity accounts as well as
dividends
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Understanding the Statement of Cash Flows:The Balance Sheet Identity
Assets = Liabilities + Equity
Current assets + net fixed assets = current liabilities+ long-term debt + common stock + retained earnings
Net working capital + net fixed assets = long-term debt + common stock + retainedearnings
Since net working capital = Cash + Other CA CL, and CL = non-interest bearing CL +
interest-bearing CL
Cash = retained earnings + current liabilities current assetsother than cash net fixed assets + long-term debt + commonstock
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How Does Retained Earnings Change?
Look at the Statement of Retained Earnings:
Add Net income
Less Dividends Retained Earnings
Retained Earnings, beginning of year 720,807
Add: Net Income 471,916
1,192,723
Less: Dividends -395,520
Retained Earnings, end of year 797,203
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Cash, beginning of year 6,489 Financing Activity
Operating Activity Increase in Notes Payable 141,217
Net Income 471,916 Increase in LT Debt 517,764Plus: Depreciation 362,325 Decrease in Common Stock -36,159
Increase in Other CL 141,049 Dividends Paid -395,520
Less: Increase in A/R -46,127 Net Cash from Financing 227,301
Increase in Inventory -93,692 Net Decrease in Cash -3,318
Increase in Other CA -82,150 Cash End of Year 3,171
Decrease in A/P -26,934
Net Cash from Operations 726,387
Investment Activity
Fixed Asset Acquisition -957,007
Net Cash from Investments -957,007
Numbers in thousands ($000s)
Sample Statement of Cash Flows
- (Change in net fixed assets+ depreciation for the year)
Refer to Slide 9
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Market information for asset details needed, is often not readilyavailable
Although accounting figures are often pale reflections of economicreality, they are frequently the best available.
Thus we have to rely on accounting figures as a starting point toextract the information we actually seek
Objectively determinable current values of many assets do not exist. Faced with a
trade-off between relevant, but subjective current values, and irrelevant, butobjective historical costs, accountants have opted for irrelevant, but objectivehistorical costs. This means that it is the users responsibility to makeadjustments
Robert Higgins of Highland Capital Partners
Accounting Statements & Market Value
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Quick Review
1. Net working capital is defined as:
A. Total liabilities minus shareholders equity.
B. Current liabilities minus shareholders equity.
C. Fixed assets minus shareholders equity.
D. Total assets minus total liabilities.
E. Current assets minus current liabilities.
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The Finance Concept of Cash Flow Cash flow is one of the most important pieces of information
that a financial manager can derive from financial statements.
We will look at how cash is generated from utilizing assets andhow it is paid to those that finance the purchase of the assets.
Cash is King in the study of finance. Finance professionalsare not concerned with accrual accounting, but rather whetherthere is enough cash generated to pay bills, investors, etc.
In finance, our concept of cash flow from assets is differentthan the accounting Statement of Cash Flows. We care aboutcash generated from operations over the period of interest.
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We are interested in Operating WorkingCapital: Business operations generally require investment in net operating
working capital. We may need operating cash on hand
Inventory
Accounts receivable
But we may also enjoy increases in Accounts Payable from oursuppliers
Funds are required for the above items to support sales although therelated cash has not yet been collected from any sale.
Note that we only consider operating working capital.
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We are interested in Operating WorkingCapital:
Operating working capital is working capital stemming from our operating policies (A/R, Inventory, A/P, etc.) and removed from our financingdecisions. (Thus we exclude non-operating working capital such as NotesPayable from our calculation of changes in Net Operating Working Capital) .
Recall that there are Two Types of Current Liabilities
Interest Bearing Liabilities (a result of financing activities )
Short Term Loans (less than 1 year maturity)
Notes Payables These are part of our financing choices , not our operating choices .
Non-Interest Bearing Liabilities (a result of operating activities ).
Accounts Payables (extended from our suppliers)
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Cash Flow Identity: Cash Flow From Assets*(CFFA)
Cash Flow From Assets =
Operating Cash Flow (OCF) Net Capital Spending (NCS)
Changes in NOWC (Net Operating Working Capital)
When there is no Interest Expense: Cash Flow From Assets (CFFA)* =Cash Flow to Creditors
+ Cash Flow to Stockholders
When there is Interest Expense: Cash Flow From Assets (CFFA)* +Interest Tax Shield = Cash Flow to Creditors
+ Cash Flow to Stockholders*also known as Free Cash Flows .
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Note: Interest is Tax Deductible Recall from the Income Statement that any interest payments are deducted
from EBIT (Earnings Before Interest and Tax) before the calculation ofTaxes. This means that interest payments function to reduce the amount of taxes
paid. Thus although interest payments are paid out in cash, they result inthe company paying less tax than it otherwise would. The reduction in the
amount of tax paid is referred to as the Interest Tax Shield . Dividend payments are not tax deductible and do not reduce the amount
of taxes paid. Thus dividend payments are paid out in cash, with nooffsetting tax shield.
When determining cash flow from assets we do not take intoaccount the interest tax shield. We separate operations from financing.Thus we consider the Interest Tax Shield separately . This Tax Shieldincreases the amount of cash flow available to Creditors and Shareholders.
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Example Info:
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Example Info Continued:
(34%)
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Example: US Corporation Part I OCF = EBIT + Depreciation (EBIT*Tax Rate) =
694 + 65 (694*0.34 = 236) = 523
NCS = Ending Net Fixed Assets Beginning NetFixed Assets + Depreciation = 1709 1644 + 65 =$130
Changes in NOWC = Ending NOWC Beginning
NOWC = (160 + 688 + 555 266) - (104 + 455 +553 -232) = $257
CFFA = 523 130 257 = $136
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Example: US Corporation Part IIInterest Tax Shield
= Cash generated from the reduction in theamount of taxes paid due to tax deductibility ofinterest
= $70 * 34% = $70 * 0.34= $24
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Example: US Corporation Part III Cash Flow to Creditors (B/S and I/S) = interest paid
net new borrowing (LT Debt and Notes Payable) =$70 [(123+454) (196+408)] = $70 -$27 = $97
Cash Flow to Stockholders (B/S and I/S) = dividends paid net new equity raised = $103 ($640 - $600) =$63
Cash flow to Creditors and Stockholders = $97 +$63 = $160 = CFFA + Interest Tax Shield = 136+24= $160
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Standardized Financial Statements Common-Size Balance Sheets
Compute all accounts as a percent of total assets Common-Size Income Statements
Compute all line items as a percent of sales
Standardized statements make it easier to compare financialinformation, particularly as the company grows
They are also useful for comparing companies of different sizes, particularly within the same industry
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Example: Common Size Balance Sheet
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Ratio Analysis Ratios are not very helpful by themselves; they need to be compared
to something
Time-Trend Analysis (over time)
Used to see how the firms performance is changing throughtime
Peer Group Analysis (with others)
Compare to similar companies or within industries
As we look at each ratio, ask yourself what the ratio is trying tomeasure and why that information is important
Ratios are used both internally and externally
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Things To Consider Concerning FinancialRatios:
1. What aspects of the firm are we attempting to analyze?2. What information goes into computing a particular ratio
and how does that information relate to the aspect of the
firm being analyzed?
3. What is the unit of measurement (times, days, percent )?
4. What are the benchmarks used for comparison? Whatmakes a ratio good or bad?
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1. Liquidity ratios (Short-Term Solvency) measure the firmsability to pay bills in the short run.
Can we make required payments as they fall due?
2. Long-Term Solvency (Financial Leverage) ratios show how
heavily the company is in debt. Do we have the right mix of debt and equity ?
3. Asset management (Turnover / Efficiency) ratios measure how productively the firm is using its assets
Do we have the right amount of assets for the level of sales?
The 5 Major Categories of Ratios
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4. Profitability ratios measure the firms return on its
investments: Do sales prices exceed unit costs, and are sales high
enough as reflected in PM, ROE, and ROA?
5. Market value ratios provides indications on thefirms prospects and how the market values the firm:
Do investors like what they see as reflected inPrice-Earning (P/E) and Market-to-Book (M/B)ratios?
The 5 Major Categories of Ratios
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1. Liquidity Ratios Liquidity is the ability to convert assets to cash quickly without a
significant loss in value .
Liquidity Ratios indicate a firms ability to meet its maturing shortterm obligations .
Is high liquidity always good? Kirk Kerkorians takeover bid forChrysler in April, 1995, is an example of investor dissatisfaction withexcess liquidity. At the time, Chryslers management had accumulated
$7.3 billion in cash and marketable securities as a cushion against aneconomic downturn. Mr. Kerkorian instigated a takeover bid becauseChryslers management refused to pay this cash to stockholders.
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Example: DLeons Financial StatementsBalance Sheet: Assets
CashA/R Inventories
Total CAGross FA
Less: Dep. Net FATotal Assets
2008
7,282632,160
1,287,3601,926,8021,202,950
263,160939,790
2,866,592
2009
85,632878,000
1,716,4802,680,1121,197,160
380,120817,040
3,497,152
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Accts payable Notes payableAccruals
Total CLLong-term debtCommon stock Retained earnings
Total Equity
Total L & E
2008524,160636,808489,600
1,650,568723,432460,000
32,592492,592
2,866,592
2009436,800300,000408,000
1,144,800400,000
1,721,176231,176
1,952,352
3,497,152
Example: DLeons Financial StatementsBalance Sheet: Liabilities and Stockholders Equity
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SalesCOGSOther expenses
EBITDA
Depr. & Amort.EBIT
Interest Exp.EBTTaxes
Net income
20086,034,0005,528,000
519,988(13,988)
116,960(130,948)
136,012(266,960)(106,784)
(160,176)
20097,035,6005,875,992
550,000609,608
116,960492,648
70,008422,640169,056
253,584
Example: DLeons Financial StatementsIncome Statement
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No. of shares
EPS
DPS
Stock price
2009
250,000
$1.014
$0.220
$12.17
2008
100,000
-$1.602
$0.110
$2.25
Example: DLeons Financial StatementsAdditional Data
DL C & Q i k R i f 2009
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DLeons Current & Quick Ratios for 2009:
Current ratio = Current assets / Current liabilities= $2,680 / $1,145 = 2.34x
Quick Ratio = (CA Inventory) / CL= ($2,680 - $1,716)/$1,145 = 0.84x
2009 2008 2007 Ind.
Current Ratio
Quick Ratio
2.34x
0.84x
1.20x
0.39x
2.30x
0.94X
2.70x
1.28x Seemingly improving but still below the industry average.
Liquidity position is weak.
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2. Long-term Solvency Also known as financial leverage ratios. Financial leverage relates to the
extent that a firm relies on debt financing rather than equity. Generally, themore debt a firm has, the more likely it is the firm will become unable to fulfillits contractual obligations.
Total Debt Ratio = Total Debt / Total Assets
VARIATIONS:
Debt/Equity Ratio = (total assets total equity) / total equity Equity Multiplier = total assets/total equity
= 1 + debt/equity ratio
Long-Term Debt Ratio = long-term debt / (long-term debt + total equity)COVERAGE RATIOS: Times Interest Earned Ratio = EBIT / interest
Cash Coverage Ratio = (EBIT + depreciation) / interest
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DLeons Long-Term Solvency Ratios
Total Debt Ratio = Total debt / Total assets
= ($1,145 + $400) / $3,497
= 0.442 or 44.2%
Times Interest Earned = EBIT / Interest expense
= $492.6 / $70 = 7.0x
2009 2008 2007 Ind.
D/A 44.2% 82.8% 54.8% 50.0%
TIE 7.0x -1.0x 4.3x 6.2x
At this point, D/A and TIE appear to be better than the industry average.
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3. Asset Management Ratios Also known as activity ratios , they measure how effectively
the firms assets are being managed: Inventory ratios measure how quickly inventory is
produced and sold
Receivable ratios provide information on the success ofthe firm in managing its collection from credit
customers Fixed asset and total asset turnover ratios show how
effective the firm is in using its assets to generate sales
f
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2009 2008 2007 Ind.
Inventory
Turnover 3.42x 4.30x 4.51x 4.82x
Inventory Turnover = COGS / Inventory = $5,876/$1,716 = 3.42x
DLeons Inventory turnover for 2009:
Inventory turnover below industry average. DLeon might have oldinventory, or its control might be poor.
Days Sales in Inventory = 365 / Inventory Turnover. For 2007,
Days Sales in Inventory = 365/3.42 = 106.7 days.2009 2008 2007 Ind.
Days Sales in
Inventory106.7 days 84.9 days 80.9 days 75.7 days
DL R i bl T f 2009
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2009 2008 2007 Ind.
Receivables
Turnover 8.01x 9.55x 9.76x 11.4x
Rec. turnover = Sales / Receivables = $7,036 / $878 = 8.01x
DLeons Receivables Turnover for 2009:
Days Sales Outstanding or Account Receivable Days or AverageCollection Period = The average number of days after making a sale
before receiving cashAccount Receivable
Average Daily SalesDSO =365
Sales
or
DSO = 365/Receivables Turnover
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DSO = Account Receivable/ Average Daily Sales
= Receivables / Sales/365
= $878 / ($7,036/365)
= $878/$19.277
= 45.6 (Days)
DLeons Days Sales Outstanding for 2009:
2009 2008 2007 Ind.
DSO 45.6 38.2 37.4 32.0
DLeon collects on sales too slowly, and is getting worse.
DLeon has a poor credit policy.
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DLeons Fixed Asset and Total Asset TurnoverRatios for 2009:
FA Turnover = Sales / Net fixed assets = $7,036 / $817 = 8.61x
TA Turnover = Sales / Total assets = $7,036 / $3,497 = 2.01x
2009 2008 2007 Ind.
FA TO 8.6x 6.4x 10.0x 7.0x
TA TO 2.0x 2.1x 2.3x 2.6x
FA turnover exceeded the industry average in 2009.
TA turnover below the industry average. Caused by excessivecurrents assets (A/R and Inv).
4 P fit bilit
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Measure how successfully a business earns a return on its investment Show the combined effects of liquidity, asset management, and debts on
operating results
4. Profitability
Profit margin = Net income / Sales = $253.6 / $7,036 = 3.6%BEP (Basic Earning Power) = EBIT/Total assets = $492.6 /$3,497 = 14.1%
2009 2008 2007 Ind.
PM 3.6% -2.7% 2.6% 3.5%
BEP 14.1% -4.6% 13.0% 19.1%
Profit margin improving. BEP removes the effects of taxes and financial leverage, and is useful for
comparison. BEP has improved substantially, but still below the industryaverage. Room for improvement.
DLeons Other Profitability Ratios for 2009:
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D Leon s Other Profitability Ratios for 2009:
Return on Assets and Return on EquityROA = Net income / Total assets = $253.6 / $3,497 = 7.3%
ROE = Net income* / Total common equity = $253.6 / $1,952 = 13.0%
*If there is preferred dividend, you should deduct it from net income
2009 2008 2007 Ind.
ROA 7.3% -5.6% 6.0% 9.1%
ROE 13.0% -32.5% 13.3% 18.2%
Both ratios rebounded from the previous year, but are still below the
industry average. More improvement needed. Wide variations in ROE illustrate the effect that leverage can have on
profitability.
Eff t f D bt ROA d ROE
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ROA is lowered by debt - interest expense lowers net income, which alsolowers ROA.
However, the use of debt lowers equity, and if equity is lowered more thannet income, ROE would increase.
Effects of Debt on ROA and ROE
Problems with ROE
ROE and shareholder wealth are correlated, but problems can arise when ROEis the sole measure of performance ROE does not consider risk ROE does not consider the amount of capital invested Might encourage managers to make investment decisions that do not
benefit shareholders ROE focuses only on return. A better measure is one that considers both risk
and return.
5 M k V l R i
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5. Market Value Ratios A set of ratios that relate the firm's stock price to its earnings, cash flows and
book value per share:
1. P/E: How much investors are willing to pay for $1 of earnings.
2. M/B: How much investors are willing to pay for $1 of book value equity.
For each ratio, the higher the number, the better.
DLeons P/E = Price / Earnings per share = $12.17 / $1.014 = 12.0x M/B = Mkt price per share / Book value per share = $12.17 / ($1,952 / 250) = 1.56x
2009 2008 2007 Ind.P/E 12.0x -1.4x 9.7x 14.2x
M/B 1.56x 0.5x 1.3x 2.4x
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The Three Ratios of the Dupont Identity
1. Profit margin (PM) is a measure of the firms operatingefficiency how well does it control costs
2. Total asset turnover (TA TO) is a measure of the firmsasset use efficiency how well does it manage its assets
3. Equity multiplier (EM) is a measure of the firms financial leverage
ROE = PM * TA TO * EM
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DLeons Extended DuPont Equation:Breaking down Return on Equity
ROE = (Profit margin) x (TA turnover) x (Equity multiplier)= 3.6% x 2 x 1.8
= 13.0%
PM TA TO EM ROE
2007 2.6% 2.3 2.2 13.3%
2008 -2.7% 2.1 5.8 -32.5%
2009 3.6% 2.0 1.8 13.0%
Ind. 3.5% 2.6 2.0 18.2%
S
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Summary Financial Statements are used for
1. Credit Decisions2. Risk Analysis
3. Financial Distress Prediction4. Management Evaluations
5. Investment Selection Du Pont Identity: ROE = PM * TA TO * EM
Lesson Review
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Lesson Review What are the main financial statements found in the
annual report?
Market value and book value are often very different.Why? Which is more important to the decision-making
process?
What are the major categories of ratios and how do youcompute the specific ratios within each category?
What are some of the problems associated withfinancial statement analysis?
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MCQ Review
1. Financial leverage refers to:
A. The amount of debt used in a firms capital structure.
B. The ratio of retained earnings to shareholders equity.
C. The ratio of paid-in surplus to shareholders equity.D. The ratio of cost-of-goods-sold to total sales.
E. The amount of receivables present in the firms assetstructure.
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2. The balance sheet identity states that:
A. Current assets + Fixed assets = Total assetsB. Assets = Liabilities + Shareholders equity
C. Current liabilities + Long-term debt = Total liabilitiesD. Common stock + Paid-in surplus + Retained earnings
= Shareholders equity
E. Cash flow = Market value Book value
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4. Ratios that measure how efficiently a firmsmanagement uses its assets in operations togenerate bottom line net income are known as:
A. Asset management ratios.
B. Leverage ratios.
C. Liquidity ratios.
D. Market value ratios.
E. Profitability ratios.
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Some Qualitative FactorsAnalysts should consider when evaluating a companyslikely future financial performance:
Are the companys revenues tied to a single customer?
To what extent are the companys revenues tied to a single product?
To what extent does the company rely on a single supplier?
What percentage of the companys business is generated overseas?
What is the competitive situation? What is the companys legal and regulatory environment?