chapter 3 analysis of financial statements © 2005 thomson/south-western
TRANSCRIPT
Financial Statements and Reports
• The Income Statement
• The Balance Sheet
• Statement of Cash Flows
• Statement of Retained Earnings
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Unilate Textiles: Comparative Income Statements
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Net Sales 1,500.0$ 1,435.0$ Cost of Goods Sold (1,230.0) (1,176.7)
Gross Profit 270.0 258.3 Fixed Operating Expenses (90.0) (85.0) Depreciation (50.0) (40.0)
EBIT 130.0 133.3 Interest (40.0) (35.0)
EBT 90.0 98.3 Taxes (40%) (36.0) (39.3)
Net Income 54.0$ 59.0$ Preferred Dividends - -
EAC 54.0 59.0 Common Dividends (29.0) (27.0)
Additions to Retained Earnings 25.0$ 32.0$
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Cash & Marketable Securities 15.0$ 40.0$ Accounts Receivable 180.0 160.0 Inventory 270.0 200.0 Total Current Assets 465.0$ 400.0$ Gross Plant & Equipment 680.0$ 600.0$ Less: Accumulated Deprec. (300.0) (250.0) Net Plant & Equipment 380.0$ 350.0$ Total Assets 845.0$ 750.0$
Unilate Textiles: Assets
Unilate Textiles: Liabilities and Equity
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2012 2012Liabilities & EquityAccounts Payable 30.0$ 15.0$ Accruals 60.0 55.0 Notes Payable 40.0 35.0 Total Current Liabilities 130.0$ 105.0$ Long-Term Bonds 300.0 255.0 Total Liabilities 430.0$ 360.0$ Common Stock 130.0 130.0 Retained Earnings 285.0 260.0 Owner's Equity 415.0$ 390.0$
Total Liabilites & Equity 845.0$ 750.0$
Unilate Textiles: Statement of Retained Earnings
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Balance of retained earnings Dec. 31, 2004 $260
Add: 2005 Net Income 54
Less: 2005 dividends to stockholders ( 29)
Balance of retained earnings Dec. 31, 2005 $285
Unilate Textiles: Statement of Cash Flows 2012
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Cash Flows from Operating ActivitiesNet Income 54.0$
Adjustments to Net IncomeDepreciation 50.0Increase in Accounts Payable 15.0Increase in Accruals 5.0Increase in Accounts Recievable (20.0)Increase in Inventory (70.0)
Net Cash Flows from Operations 34.0$
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Unilate Textiles: Statement of Cash Flows Continued
Cash Flows from Long-Term InvestmentsAcquisition of Fixed Assets (80.0)$
Cash Flows from Financing ActivitiesIncrease in Notes Payable 5.0$ Increase in Bonds 45.0 Dividend Payment (29.0)
Net Cash Flow from Financing 21.0$
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Unilate Textiles: Statement of Cash Flows Continued
Cash Flows from Operations 34.0$ Cash Flows from Long-Term Investments (80.0) Cash Flows from Financing Activities 21.0
Net Change in Cash (25.0) Cash at the Beginning of the Year 40.0
Cash at the End of the Year 15.0$
Ratio Analysis
• Analysis of a firm’s ratios is generally the first step in financial analysis.
• Ratios are designed to show relationships between financial statement accounts within firms and between firms.
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What is the Purpose of Ratio Analysis?
• Give idea of how well the company is doing
• Standardize numbers; facilitate comparisons• Used to highlight weaknesses and strengths
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What Are the Five Major Categories of Ratios?What Questions Do They Answer?
• Liquidity: Can we make required payments in the current period?
• Asset mgt.: Right amount of assets vs. sales?• Debt mgt.: Right mix of debt and equity?• Profitability: Do sales prices exceed unit costs, and are
sales high enough as reflected in PM, ROE, and ROA?• Market values: Do investors like what they see as
reflected in P/E and M/B ratios?
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Industry Average Data
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RatioCurrent 4.1xQuick 2.1xInventory Turnover 7.4xDays Sales Outstanding (DSO) 32.1 daysFixed Asset Turnover 4.0xTotal Asset Turnover 2.1xDebt Ratio 45.0%TIE 6.5xFixed Charge Coverage 5.8xProfit Margin 4.7%ROA 12.6%ROE 17.2%Price/Earnings 13.0xMarket/Book 2.0x
What is Unilate’s Current Ratio?
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Current Ratio = Current AssetsCurrent Liabilities
$465.0$130.0
= = 3.6 times
Industry average = 4.1 times
What is Unilate’s Quick, or Acid Test, Ratio?
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Industry average = 2.1 times
$465.0 - $270.0$130.0
Quick Ratio = Current Assets- InventoriesCurrent Liabilities
= = = 1.5 times$195.0$130.0
Unilate’s Liquidity Position• Ratios is slightly below industry average.• Inventories are the least liquid of Unilate’s assets
and they are the assets that suffer losses in the event of a forced sale.
• The quick ratio shows that, if receivables are collected in full, Unilate can payoff its current liabilities without having to liquidate its inventory.
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What is Unilate’s Inventory Turnover Ratio?
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=$1,230.0$270.0
= 4.66. times
Inventory turnover =Cost of good sold
Inventories
Industry average = 7.4 times
Comments on Unilate’s Inventory Turnover• Compares poorly with industry
• May be holding excess inventories
• May be holding old/obsolete inventory.
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What is Unilate’s Days Sales Outstanding Ratio?
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Industry average = 32.1 days
days 43.2$4.167
$180.0
360
$1,500.0
$180.0
360
Sales Annual
sReceivable
SalesDaily
sReceivableDSO
What is Unilate’s Fixed Assets Turnover Ratio?
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Fixed assets turnover =Sales
Net fixed assets
=$1,500.0$380.0
= 3.9 times
= 4.0 timesIndustry Average
What is Unilate’s Total Assets Turnover Ratios?
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Total asse ts turnover =Sales
Total asse ts
=$1,500.0$845.0 = 1.8 times
= 2.1 timesIndustry Average
Unilate’s Fixed Assets Turnover and Total Assets Turnover
• Total asset turnover is below industry average.
• Unilate might have excess inventories and receivables.
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Calculate the Debt Ratio
Debt Ratio = Total debt Total assets
= +
=
$130.0. $300.0.$845.0
45.0%
= $430.0$845.0
=0.509 = 50.9%
Industry Average
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Calculate the Times-Interest-Earned Ratio
TIE = EBIT Interest charges
3.3 times$40.0
$130.0==
Industry Average = 6.5 times
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Calculate theFixed Charge Coverage Ratio
All three previous ratios reflect use of debt, but focus on different aspects.
rateTax 1
payment fund Sinkingpayments
LeasechargesInterest
payments LeaseEBITFCC
2.2
3.63$
0.140$
0.10$0.400.41
$8.0$
$10.0$130.0
Industry Average = 5.8x
Unilate’s Profitability Ratios--Profit Margin, ROA, and ROE
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4.7%Industry Average =
Profit margin = Net income
Sales
$54.0$1,500
0.036 = 3.6%==
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Unilate’s ROA, and ROE
12.6%Industry Average =
17.2%Industry Average =
$54.0$845.0
= 0.064 = 6.4%
=
ROA = Net income
Total assets
$54.0$415.0
- 0 = 0.130 = 13.0%=
ROENet income
=Common equity
Unilate’s Market Value Ratios Price/Earnings Ratio
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10.6 times $2.16$23.00
Price / earnings ratio =Price per share
Earnings per share
13.0 timesIndustry Average =
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Unilate’s Market Value Ratios Market/Book Ratio
Market / Book ratio = Market price per share
Book value per share
$23.00$16.00
1.4 times
2.0 timesIndustry Average =
Rate of Return on Common Equity
30 2001 2002 2003 2004 2005
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UnilateUnilate
IndustryIndustry
Summary of Ratio Analysis:The DuPont Equation
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ROA = Net Profit Margin X Total Assets TurnoverNet Income
Sales
Sales Total Assets
X=
$54.0$1,500.0
X=$1,500.0$845.0
= 3.6% X 1.8 = 6.4%
DuPont Equation Provides Overview• Firm’s profitability (measured by ROA)
• Firm’s expense control (measured by profit margin)
• Firm’s asset utilization (measured by total asset turnover)
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What are Some PotentialProblems and Limitations ofFinancial Ratio Analysis?
• Comparison with industry averages is difficult if the firm operates many different divisions.
• “Average” performance not necessarily good.
• Inflation distorts balance sheets.
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What are Some PotentialProblems and Limitations ofFinancial Ratio Analysis?
• Seasonal factors can distort ratios.• “Window dressing” techniques can make
statements and ratios look better.• Different operating and accounting
practices distort comparisons.
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