financial st analysis
DESCRIPTION
Financial Statement Analysis PresentationTRANSCRIPT
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Chapter 6Chapter 6Financial Statement Financial Statement
AnalysisAnalysis
6-3
Financial Financial Statement AnalysisStatement Analysis
Financial Statements A Possible Framework for Analysis Common-Size and Index Analysis Ratio Analysis Trend Analysis
6-4
Balance Sheet.
Financial StatementsFinancial Statements
Income Statement
Statement of Changes in
Equity
Cash Flow Statement
Notes to the Accounts
6-5
The Balance Sheet describes a company’s
financial position on a particular day
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Net income is the difference between
Revenues and Expenses.
The Income Statement describes a company’s revenues and expenses along with the resulting net income or loss over
a period of time due to operating activities.
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The net income of $2,200 increases
Scott’s capital by $2,200.
The Statement of
Changes in Equity explains
changes in equity from net income (or net loss) and
equity injected by the owner in business and drawings for a period of time.
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The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
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Cash flow StatementCash flow Statement
What you need to prepare Cash flow Statement?
Current year’s Balance Sheet and Income Statement and ;
Previous year’s Balance Sheet
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It is the key to prepare the Financial Statements
It tells us about the
polices and practices of
the company.
Notes to the AccountsNotes to the Accounts
Historical cost cost
DepreciationnnnSLM or DBMGoing concern
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Examples of External Uses Examples of External Uses of Statement Analysisof Statement Analysis
Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm.
BondholdersBondholders -- Focus on the short and long-term cash flow of the firm.
ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
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Examples of External Uses of Examples of External Uses of Statement Analysis cont---Statement Analysis cont---
GovernmentGovernment -- Focuses on the pre-tax profit for taxation purpose.
Supplires of fundsSupplires of funds -- Focus on the operating profit and long-term cash flows of the firm.
EmployeesEmployees -- Focus on the long-term health of the firm.
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Examples of Internal Uses Examples of Internal Uses of Statement Analysisof Statement Analysis
PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
ControlControl -- Focus on return on investment for various assets and asset efficiency.
UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
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Framework for Framework for Financial AnalysisFinancial Analysis
Analytical Tools UsedAnalytical Tools UsedStatement of Cash Flows
Cash Budgets
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
Trend / Seasonal ComponentTrend / Seasonal ComponentHow much funding will be
required in the future?Is there a seasonal
component?
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Framework for Framework for Financial AnalysisFinancial Analysis
Health of a Firm
Financial Ratios
1. Individually2. Over time3. In combination4. In comparison
1. Analysis of the funds needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
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Framework for Framework for Financial AnalysisFinancial Analysis
ExamplesExamples::Volatility in salesVolatility in costs
Proximity to break-even point
1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm.3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
Business riskBusiness risk relates to the risk inherent in the operations of the firm.
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Framework for Framework for Financial AnalysisFinancial Analysis
A Financial Manager
must consider all three jointly
when determining
the financing
needs of the firm.
DeterminingDeterminingthe the
financingfinancingneeds of needs of the firm.the firm.
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
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Framework for Framework for Financial AnalysisFinancial Analysis
NegotiationsNegotiationswithwith
suppliers ofsuppliers ofcapital.capital.
DeterminingDeterminingthe the
financingfinancingneeds of needs of the firm.the firm.
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
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Financial Statement AnalysisFinancial Statement Analysis
Converting into %ageConverting into %age
Ratio AnalysisRatio Analysis
STEPSSTEPS
Reading Regular FiguresReading Regular Figures
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Reading the Regular FiguresReading the Regular Figures
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Basket Wonders’ Balance Basket Wonders’ Balance Sheet (Asset Side)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. deductions for
wear and tear.
Cash and C.E. $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Exp dd 5 Accum Tax Prepay 10 Current AssetsCurrent Assetsee $1,195 $1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329) Net Fix. AssetsNet Fix. Assets $ 701 $ 701 Investment, LT 50 Other Assets, LT 223 Total Total AssetsAssets bb $2,169 $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2010Basket Wonders Balance Sheet (thousands) Dec. 31, 2010a
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Basket Wonders’ Balance Basket Wonders’ Balance Sheet (Liability Side)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.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxes dd 16 Other Accrued Liab. dd 100 Current Liab.Current Liab. ee $ 500 $ 500 Long-Term Debt ff 530 Shareholders’ Equity Com. Stock ($1 par) gg 200 Add Pd in Capital gg 729 Retained Earnings hh 210
Total EquityTotal Equity $ $1,1391,139 Total Liab/EquityTotal Liab/Equitya,ba,b $2,169 $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2010Basket Wonders Balance Sheet (thousands) Dec. 31, 2010
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Basket Wonders’ Basket Wonders’ Income StatementIncome 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 Sales $ 2,211 Cost of Goods Sold bb 1,599
Gross Profit $ 612 SG&A Expenses c c 402 EBITd $ 210 Interest Expensee 59 EBT f f $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53 $ 53
Basket Wonders Statement of Earnings (in thousands) Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2010for Year Ending December 31, 2010a
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Financial Statement Financial Statement AnalysisAnalysis
Step 2Step 2
Converting into percentagesConverting into percentages
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Common-size AnalysisCommon-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.
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Basket Wonders’ Common Basket Wonders’ Common Size Balance SheetsSize Balance Sheets
Regular (thousands of $) Common-Size (%) Assets 2008 2009 2010 2008 2009 2010 Cash 148 100 90 12.10 4.89 4.15 AR 283 410 394 23.14 20.06 18.17 Inv 322 616 696 26.33 30.14 32.09
Other CA 10 14 15 0.82 0.68 0.69 Tot CA 763 1,140 1,195 62.39 55.77 55.09 Net FA 349 631 701 28.54 30.87 32.32 LT Inv 0 50 50 0.00 2.45 2.31
Other LT 111 223 223 9.08 10.91 10.28 Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0
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Basket Wonders’ Common Basket Wonders’ Common Size Balance SheetsSize Balance Sheets
Regular (thousands of $) Common-Size (%) Liab+Equity 2008 2009 2010 2008 2009 2010
Note Pay 290 295 290 23.71 14.43 13.37 Acct Pay 81 94 94 6.62 4.60 4.33 Accr Tax 13 16 16 1.06 0.78 0.74
Other Accr 15 100 100 1.23 4.89 4.61 Tot CL 399 505 500 32.62 24.71 23.05
LT Debt 150 453 530 12.26 22.16 24.44 Equity 674 1,086 1,139 55.11 53.13 52.51
Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0
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Basket Wonders’ Common Basket Wonders’ Common Size Income StatementsSize Income Statements
Regular (thousands of $) Common-Size (%) 2008 2009 2010 2008 2009 2010
Net Sales 1,235 2,106 2,211 100.0 100.0 100.0 COGS 849 1,501 1,599 68.7 71.3 72.3
Gross Profit 386 605 612 31.3 28.7 27.7 Adm. 180 383 402 14.6 18.2 18.2 EBIT 206 222 210 16.7 10.5 9.5
Int Exp 20 51 59 1.6 2.4 2.7 EBT 186 171 151 15.1 8.1 6.8 EAT 112 103 91 9.1 4.9 4.1
Cash Div 50 50 50 4.0 2.4 2.3
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Index AnalysesIndex Analyses
An analysis of percentage financial statements where all balance sheet 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.
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Basket Wonders’ Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets
Regular (thousands of $) Indexed (%) Assets 2008 2009 2010 2008 2009 2010 Cash 148 100 90 100.0 67.6 60.8 AR 283 410 394 100.0 144.9 139.2 Inv 322 616 696 100.0 191.3 216.1
Other CA 10 14 15 100.0 140.0 150.0 Tot CA 763 1,140 1,195 100.0 149.4 156.6 Net FA 349 631 701 100.0 180.8 200.9 LT Inv 0 50 50 100.0 inf. inf.
Other LT 111 223 223 100.0 200.9 200.9 Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4
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Basket Wonders’ Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets
Regular (thousands of $) Indexed (%) Liab+Equity 2008 2009 2010 2008 2009 2010
Note Pay 290 295 290 100.0 101.7 100.0 Acct Pay 81 94 94 100.0 116.0 116.0 Accr Tax 13 16 16 100.0 123.1 123.1
Other Accr 15 100 100 100.0 666.7 666.7 Tot CL 399 505 500 100.0 126.6 125.3
LT Debt 150 453 530 100.0 302.0 353.3 Equity 674 1,086 1,139 100.0 161.1 169.0
Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
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Basket Wonders’ Indexed Basket Wonders’ Indexed Income StatementsIncome Statements
Regular (thousands of $) Indexed (%) 2008 2009 2010 2008 2009 2010
Net Sales 1,235 2,106 2,211 100.0 170.5 179.0 COGS 849 1,501 1,599 100.0 176.8 188.3
Gross Profit 386 605 612 100.0 156.7 158.5 Adm. 180 383 402 100.0 212.8 223.3 EBIT 206 222 210 100.0 107.8 101.9
Int Exp 20 51 59 100.0 255.0 295.0 EBT 186 171 151 100.0 91.9 81.2 EAT 112 103 91 100.0 92.0 81.3
Cash Div 50 50 50 100.0 100.0 100.0
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STEP 3STEP 3The Ratio Analysis.The Ratio Analysis.
The most The most important tool of allimportant tool of all
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What are Financial Ratios?What are Financial Ratios?
Types of Types of ComparisonsComparisons
Internal Internal ComparisonsComparisons
External External ComparisonsComparisons
A Financial Ratio is an index that relates
two accounting numbers and is
obtained by dividing one number by the
other.
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External Comparisons and External Comparisons and Sources of Industry RatiosSources of Industry Ratios
Examples:Robert Morris Robert Morris
AssociatesAssociates
Dun & BradstreetDun & Bradstreet
Standard and Standard and Poor’s (S&P)Poor’s (S&P)
This involves comparing the ratios of one firm with those of similarsimilar firms or with
industry averages.
SimilaritySimilarity is important as one should
compare “apples to apples.”
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International Credit Rating Agencies: Standard & Poor's (S&P) Moody Investor’s service Fitch Ratings Dun & Bradstreet
Credit Rating Credit Rating AgenciesAgencies
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Credit rating agencies in Credit rating agencies in PakistanPakistan
Japan Credit Rating – vital information service Japan Credit Rating – vital information service (JCR- VIS)(JCR- VIS)
Pakistan Credit Rating Agency (PACRA)Pakistan Credit Rating Agency (PACRA)
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Net Working Capital Net Working Capital or Circulating Capitalor Circulating Capital
Net working capital is the excess of current Net working capital is the excess of current assets Over the current liabilities.assets Over the current liabilities.
$1,195 – $500 = $695$1,195 – $500 = $695
Net working capital = Current assets – Current liabilities
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Net working capital Net working capital ComparisonsComparisons
BW Industry$695 $625 687 608 555 585
Year201020092008
Net working capitalNet working capital
The NWC is more than the industry .
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Liquidity RatiosLiquidity Ratios
Current RatioCurrent Ratio
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2010
Shows a firm’s ability to cover its current liabilities with its current assets.
Balance Sheet Ratios
Liquidity Ratios
$1,195$1,195$500$500
= 2.39:12.39:1
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Liquidity Ratio Liquidity Ratio ComparisonsComparisons
BW Industry2.39 2.152.26 2.091.91 2.01
Year201020092008
CurrentCurrent RatioRatio
Ratio is stronger than the industry average.
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Current Ratio -- Trend Current Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Current Ratio
1.5
1.7
1.9
2.1
2.3
2.5
2008 2009 2010
Analysis Year
Rat
io V
alue
BWIndustry
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Liquidity RatiosLiquidity Ratios
Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2010
Shows a firm’s ability to meet
current liabilities with its most liquid
assets.
Balance Sheet Ratios
Liquidity Ratios
$1,195 - $696$1,195 - $696$500$500
= 1 : 11 : 1
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Liquidity Ratio Liquidity Ratio ComparisonsComparisons
BW Industry1.00 1.251.04 1.231.11 1.25
Year201020092008
Acid-Test RatioAcid-Test Ratio
Ratio is weaker than the industry average.
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Acid-Test Ratio -- Trend Acid-Test Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Acid-Test Ratio
0.5
0.8
1.0
1.3
1.5
2008 2009 2010
Analysis Year
Rat
io V
alue
BWIndustry
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Summary of the Liquidity Summary of the Liquidity Ratio ComparisonsRatio 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.
RatioRatio BWBW IndustryIndustryCurrent 2.39 2.15Acid-Test 1.00 1.25
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Summary of the Liquidity Summary of the Liquidity Trend AnalysesTrend Analyses
The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventoriesinventories are a significant problem for BWBW.
The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
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Financial Leverage RatiosFinancial Leverage Ratios
Debt-to-EquityDebt-to-Equity
Total DebtTotal DebtShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2010Shows the extent to
which the firm is financed by debt.
Balance Sheet Ratios
Financial LeverageRatios
$1,030$1,030$1,139$1,139
= 0.90:1.90:1
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Financial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry .90 .90 .88 .90 .81 .89
Year201020092008
Debt-to-Equity RatioDebt-to-Equity Ratio
BW has average debt utilizationrelative to the industry average.
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Financial Leverage RatiosFinancial Leverage Ratios
Debt-to-Total-AssetsDebt-to-Total-Assets
Total DebtTotal DebtTotal AssetsTotal Assets
For Basket Wonders December 31, 2010Shows the percentage
of the firm’s assets that are supported by
debt financing.
Balance Sheet Ratios
Financial LeverageRatios
$1,030$1,030$2,169$2,169
= 0 .47 : 1.47 : 1
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Financial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry .47 .47 .47 .47 .45 .47
Year201020092008
Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio
BW has average debt utilizationrelative to the industry average.
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Financial Leverage RatiosFinancial Leverage Ratios
Total CapitalizationTotal Capitalization
Total DebtTotal DebtTotal CapitalizationTotal Capitalization
For Basket Wonders December 31, 2010
Shows the relative importance of long-term
debt to the long-term financing of the firm.
Balance Sheet Ratios
Financial LeverageRatios
$1,030$1,030$1,669$1,669
= .62:1.62:1
(i.e., LT-Debt + Equity)
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Financial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry .62 .60 .62 .61 .67 .62
Year201020092008
Total Capitalization RatioTotal Capitalization Ratio
BW has average long-term debt utilizationrelative to the industry average.
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Coverage RatiosCoverage Ratios
Interest CoverageInterest Coverage
EBITEBITInterest ChargesInterest Charges
For Basket Wonders December 31, 2010Indicates a firm’s
ability to cover interest charges.
Income StatementRatios
Coverage Ratios
$210$210$59$59
= 3.56 times3.56 times
6-55
CoverageCoverageRatio ComparisonsRatio Comparisons
BW Industry 3.56 5.19 4.35 5.0210.30 4.66
Year201020092008
Interest Coverage RatioInterest Coverage Ratio
BW has below average interest coveragerelative to the industry average.
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Coverage Ratio -- Trend Coverage Ratio -- Trend Analysis ComparisonAnalysis Comparison
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Summary of the Coverage Summary of the Coverage Trend AnalysisTrend Analysis
This indicates that low earnings low earnings (EBIT) may be a potential problem for BWBW.
Note, we know that debt levels debt levels are in line with the industryindustry averages.
The interest coverage ratio for BWBW has been falling since 2008. It has been below industryindustry averages for the past two years.
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Activity RatiosActivity Ratios
Receivable TurnoverReceivable Turnover
Annual Net Credit SalesAnnual Net Credit Sales Closing ReceivablesClosing Receivables
For Basket Wonders December 31, 2010Indicates quality of
receivables and how successful the firm is in
its collections.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$2,211$2,211$394$394
= 5.61 Times5.61 Times
(Assume all sales are credit sales.)
6-59
Activity RatiosActivity Ratios
Avg Collection PeriodAvg Collection Period
Days in the YearDays in the YearReceivable TurnoverReceivable Turnover
For Basket Wonders December 31, 2010
Average number of days that receivables are
outstanding.(or RT in days)
Income Statement /Balance Sheet
Ratios
Activity Ratios
3653655.615.61
= 65 days65 days
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ActivityActivityRatio ComparisonsRatio Comparisons
BW Industry65.0 65.771.1 66.383.6 69.2
Year201020092008
Average Collection Period in daysAverage Collection Period in days
BW has improved the average collection period to that of the industry average.
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Activity RatiosActivity Ratios
Payable Turnover (PT)Payable Turnover (PT)
Annual Credit PurchasesAnnual Credit Purchases Closing PayableClosing Payable
For Basket Wonders December 31, 2010Indicates the
promptness of payment to suppliers by the firm.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$1551$1551$94$94 = 16.5 Times16.5 Times
(Assume annual credit purchases = $1,551.)
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Activity RatiosActivity Ratios
PT in DaysPT in Days
Days in the YearDays in the YearPayable TurnoverPayable Turnover
For Basket Wonders December 31, 2010Average number of days
that payables are outstanding.
Income Statement /Balance Sheet
Ratios
Activity Ratios
36536516.516.5
= 22.1 days22.1 days
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ActivityActivityRatio ComparisonsRatio Comparisons
BW Industry22.1 46.725.4 51.143.5 48.5
Year201020092008
Payable Turnover in DaysPayable Turnover in Days
BW has improved the PT in Days.Is this good?Is this good?
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Activity RatiosActivity Ratios
Inventory TurnoverInventory Turnover
Cost of Goods SoldCost of Goods SoldClosing InventoryClosing Inventory
For Basket Wonders December 31, 2010Indicates the
effectiveness of the inventory management practices of the firm.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$1,599$1,599$696$696
= 2.30 Times2.30 Times
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Activity RatiosActivity Ratios
Inventory T/O in DaysInventory T/O in Days
Days in the YearDays in the YearInventory TurnoverInventory Turnover
For Basket Wonders December 31, 2010Average number of days
that payables are outstanding.
Income Statement /Balance Sheet
Ratios
Activity Ratios
3653652.302.30
= 158.69 days days
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ActivityActivityRatio ComparisonsRatio Comparisons
BW Industry158.69 111.59 149.59 97.07 138.25 98.91
Year201020092008
Inventory Turnover in DaysInventory Turnover in Days
BW has improved the PT in Days.Is this good?Is this good?
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Inventory Turnover Ratio --Inventory Turnover Ratio --Trend Analysis ComparisonTrend Analysis Comparison
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Activity RatiosActivity Ratios
Total Asset TurnoverTotal Asset Turnover
Net SalesNet SalesTotal AssetsTotal Assets
For Basket Wonders December 31, 2010Indicates the overall
effectiveness of the firm in utilizing its assets to
generate sales.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$2,211$2,211$2,169$2,169
= 1.02:11.02:1
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ActivityActivityRatio ComparisonsRatio Comparisons
BW Industry1.02 1.171.03 1.141.01 1.13
Year201020092008
Total Asset Turnover RatioTotal Asset Turnover Ratio
BW has a weak total asset turnover ratio.Why is this ratio considered weak?Why is this ratio considered weak?
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Profitability RatiosProfitability Ratios
Gross Profit MarginGross Profit Margin
Gross ProfitGross ProfitNet SalesNet Sales
For Basket Wonders December 31, 2010Indicates the efficiency
of operations and firm pricing policies.
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$612$612$2,211$2,211
X100= 27.67%
x100
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ProfitabilityProfitabilityRatio ComparisonsRatio Comparisons
BW Industry27.7% 31.1%28.7 30.831.3 27.6
Year201020092008
Gross Profit MarginGross Profit Margin
BW has a weak Gross Profit Margin.
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Gross Profit Margin --Gross Profit Margin --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Gross Profit Margin
25.0
27.5
30.0
32.5
35.0
2008 2009 20010
Analysis Year
Rat
io V
alue
(%)
BWIndustry
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Profitability RatiosProfitability Ratios
Net Profit MarginNet Profit Margin
Net Profit after TaxesNet Profit after TaxesNet SalesNet Sales
For Basket Wonders December 31, 2010Indicates the firm’s
profitability after taking account of all expenses
and income taxes.
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$91$91$2,211$2,211
= 4.1%4.1%X 100
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ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
BW Industry4.1% 8.2%4.9 8.19.0 7.6
Year201020092008
Net Profit MarginNet Profit Margin
BW has a poor Net Profit Margin.
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Net Profit Margin --Net Profit Margin --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Net Profit Margin
4
5
6
7
8
9
10
2008 2009 2010
Analysis Year
Rat
io V
alue
(%)
BWIndustry
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Profitability RatiosProfitability RatiosReturn on InvestmentReturn on Investment
Net Profit after TaxesNet Profit after TaxesTotal AssetsTotal Assets
For Basket Wonders December 31, 2010Indicates the profitability
on the assets of the firm (after all expenses and
taxes).
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$91$91$2,160$2,160
X100 = 4.2%4.2%
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ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
BW Industry4.2% 9.8%5.0 9.19.1 10.8
Year201020092008
Return on InvestmentReturn on Investment
BW has a poor Return on Investment.
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Return on Investment –Return on Investment –Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Return on Investment
4
6
8
10
12
2008 2009 2010
Analysis Year
Rat
io V
alue
(%)
BWIndustry
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Profitability RatiosProfitability RatiosReturn on EquityReturn on Equity
Net Profit after TaxesNet Profit after TaxesShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2010Indicates the profitability
to the shareholders of the firm (after all expenses
and taxes).
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$91$91$1,139$1,139
X100 = 8% 8%
6-80
ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
BW Industry 8.0% 17.9% 9.4 17.216.6 20.4
Year201020092008
Return on EquityReturn on Equity
BW has a poor Return on Equity.
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Return on Equity --Return on Equity --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Return on Equity
7.0
10.5
14.0
17.5
21.0
2008 2009 2010
Analysis Year
Rat
io V
alue
(%)
BWIndustry
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Return on Investment and Return on Investment and the Du Pont Approachthe Du Pont Approach
ROIROI2010 = .041 x 1.02 = .042.042 or 4.2%4.2%
ROIROIIndustry = .082 x 1.17 = .098.098 or 9.8%9.8%
ROI ROI = Net profit margin X Total asset turnover
Earning Power Earning Power = Sales profitability X Asset efficiency
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Return on Equity and Return on Equity and the Du Pont Approachthe Du Pont Approach
ROEROE2010 = .041 x 1.02 x 1.90 = .080.080
ROEROEIndustry = .082 x 1.17 x 1.88 = .179179
Return On Equity Return On Equity = Net profit margin X Total asset turnover X
Equity Multiplier
Equity Multiplier Equity Multiplier = Total AssetsShareholders’ Equity
6-84
Summary of the Profitability Summary of the Profitability Trend AnalysesTrend Analyses
The profitability ratios for BWBW have ALL been falling since 2008. Each has been below the industryindustry averages for the past three years.
This indicates that COGSCOGS and administrative costsadministrative costs may both be too high and a potential problem for BWBW.
Note, this result is consistent with the low interest coverage ratio.
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Summary of Ratio AnalysesSummary 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 costs may be too high.
6-86
Market RatiosMarket Ratios
Earning per share (EPS) Dividend per share (DPS) Dividend payout ratio Dividend yield ratio Price earning ratio (P/E ratio) Market to Book value per share
ratio
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Quick QuizQuick Quiz
What includes the Financial Statements?
What is meant by Financial Statements analysis?
Name different parties, interested in Financial Statements analysis and why?
6-88
Quick QuizQuick Quiz
Why it is essential to have some framework in mind, for the purpose of Financial Statements analysis?
A numerical exercise regarding Common Size and Index Statements and their analyses.
A numerical exercise regarding Financial or Accounting ratios and their analyses.
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