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Prentice Hall, 2004 Chapter 14Wheelen/Hunger

1

Chapter 14

Suggestions for Case Analysis

PowerPoint Slides Anthony F. Chelte

Western New England College

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2

Case Analysis

Research:

Go beyond information in the case

Research environmental setting Check decision date of case

Use information services ± COMPUSTAT, Compact Disclosure,

CD/International ± www.hoovers.com

± www.sec.gov

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3

Case Analysis

Research:

Annual reports

10K form

Income statements

Balance sheets

Cash flow statements

Economic conditions

Industry information

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5

Case Analysis

Resources for Case Library Research:

± Economic Information:

Business Cycle Development

U.S. Census Bureau

Current Business R eports

Economic Indicators

Long-Term Economic Growth Monthly Labor R eview

U.S. Industrial Outlook

Overseas Business R eports

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6

Case Analysis


±

Industry Information: Business Week

Fortune

Industry Survey

Industry Week Forbes

Inc.

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7

Case Analysis


± Directory and Index Information: Business Periodical Index

Directory of National Trade Associations

Encyclopedia of Associations

Funk and Scott¶s Index of Corporations

and Industries Thomas¶s R egister of American

Manufacturers

Wall Street Journal Index

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8

Case Analysis


± Ratio Analysis Information:

Almanac of Business and Industrial

Financial R atios

Annual Statement Studies

Dun¶s R eview

Industry Norms and Key Business R atios

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9

Case Analysis


± Online Information:

www.hoovers.com

www.sec.gov

www.pathfinder.com

www.dbisna.com/dnb/dnbhome.htm

www.fuld.com

www.economist.com

www.w100.com

www.bloomberg.com

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11

Financial Ratio Analysis ² Liquidity

1. Liquidity Ratios

Current ratio

Quick (acid test) ratio

Inventory to networking capital

Cash ratio

HowFormula Expressed Meaning

Current assets²²²²²²²²²

Current liabilities Decimal

Decimal

Decimal

Decimal

A short-term indicator of the company¶sability to pay its short-term liabilitiesfrom short-term assets; how much of current assets are available to cover

each dollar of current liabilities.

Measures the company¶s ability to payoff its short-term obligations fromcurrent assets, excluding inventories.

A measure of inventory balance;measures the extent to which thecushion of excess current assets over current liabilities may be threatened by

unfavorable changes in inventory.

Measures the extent to which thecompany¶s capital is in cash or cashequivalents; shows how much of thecurrent obligations can be paid fromcash or near-cash assets.

Current assets ± Inventory²²²²²²²²²²²²

Current liabilities

Inventory²²²²²²²²²²²²²²²Current assets ± Current liabilities

Cash + Cash equivalents²²²²²²²²²²²

Current liabilities

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12

Financial Ratio Analysis ²

Profitability

2 . Profitability Ratios

Net profit margin

Gross profit margin

Return on investment(ROI)

Return on equity(ROE)

Earnings per share(EPS)


Net profit after taxes²²²²²²²²²

Net sales Percentage

Percentage

Percentage

Percentage

Dollars per share

Shows how much after-tax profits aregenerated 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 totalassets utilized in the company; ameasure of management¶s efficiency, itshows the return on all the assetsunder its control regardless of sourceof f inancing.

Measures the rate of return on thebook value of shareholders¶ totalinvestment in the company.

Shows the after-tax earningsgenerated for each share of commonstock.

Sales ± Cost of goods sold²²²²²²²²²²²²²

Net sales


Shareholders¶ equity

Net profit after taxes ±

preferred stock dividends²²²²²²²²²²²²

Average number of common shares


Total assets

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Prentice Hall, 2004 Chapter 14Wheelen/Hunger 13

Financial Ratio Analysis ² Activity

3. Activity Ratios

Inventory turnover

Days of inventory

Net working capitalturnover

Asset turnover

Fixed asset turnover

Average collectionperiod

Accounts receivableturnover

Accounts payableperiod

Days of cash


Net sales²²²²²²²

Inventory Decimal

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 day¶s worth of inventory that

a company has on hand at any given time.Measures how effectively the net working capital is usedto generate sales.

Measures the utilization of all the company¶s assets;measures how many sales are generated by each dollar of assets.

Measures the utilization of the company¶s fixed assets(i.e., plant and equipment); measures how many salesare generated by each dollar of fixed assets.

Indicates the average length of time in days that acompany must wait to collect a sale after making it; maybe compared to the credit terms offered by the companyto its customers.

Indicates the number of times that accounts receivableare cycled during the period (usually a year).

Indicates the average length of time in days that thecompany takes to pay its credit purchases.

Indicates the number of days of cash on hand, at presentsales levels.

Inventory²²²²²²²²²²²Cost of goods sold ÷ 365

Net sales²²²²²²²²²Net working capital

Sales²²²²²²²²²

Total assets

Sales²²²²²²²

Fixed assets

Accounts receivable²²²²²²²²²Sales for year ÷ 365

Annual credit sales²²²²²²²²² Accounts receivable

Accounts payable²²²²²²²²²²²²Purchases for year ÷ 365

Cash²²²²²²²²²²²Net sales for year ÷ 365

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Financial Ratio Analysis ² Leverage

4. Leverage Ratios

Debt to asset ratio

Debt to equity ratio

Long-term debt tocapital structure

Times interest earned

Coverage of fixedcharges

Current liabilities toequity


Total debt²²²²²²²

Total assetsPercentage

Percentage

Percentage

Decimal

Decimal

Percentage

Measures the extent to which borrowedfunds have been used to finance thecompany¶s assets.

Measures the funds provided by creditorsversus the funds provided by owners.

Measures the long-term component of capital structure.

Indicates the ability of the company tomeet its annual interest costs.

A measure of the company¶s ability tomeet all of its f ixed-charge obligations.

Measures the short-term financingportion versus that provided by owners.

Total debt²²²²²²²²²Shareholders¶ equity

Long-term debt²²²²²²²²²Shareholders¶ equity

Profit before taxes +Interest charges + Lease charges

²²²²²²²²²²²²²²²²Interest charges + Lease obligations

Profit before taxes + Interest charges²²²²²²²²²²²²²²²²

Interest charges

Current liabilities²²²²²²²²²Shareholders¶ equity

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Financial Ratio Analysis ² Other

5 . Other Ratios

Price/earning ratio

Dividend payout ratio

Dividend yield oncommon stock


Market price per share²²²²²²²²²Earnings per share Decimal

Percentage

Percentage

Shows the current market¶s evaluationof a stock, based on its earnings;shows how much the investor is willingto pay for each dollar of earnings.

Indicates the percentage of profit thatis paid out as dividends.

Indicates the dividend rate of return tocommon shareholders at the current

market price.

Annual dividends per share²²²²²²²²²²²² Annual earnings per share

Annual dividends per share²²²²²²²²²²²²²²²

Current market price per share

Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios forthe particular industry. Refer to Standard and Poor·s and Robert Morris Associates for average industry data. Special thanksto Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M University²Corpus Christi, Corpus Christi, Texas, forhis definitions of these ratios.

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Case Analysis

Analyzing Financial Statements:

± Scrutinize historical statements

± Compare historical statements over

time

± Calculate changes in categories from

year to year

± Determine the change as a percentage ± Adjust for inflation

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Case Analysis

Common Size Statements: ± Income statements and balance

sheets in which the dollar figures have

been converted into percentages.

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Altman¶s Bank ruptcy Formula

Z = 1.2 x 1 + 1.4 x 2 + 3.3 x 3 + 0.6 x 4 + 1.0 x 5

where

x 1 = Working capital divided by total assets.

x 2 = Retained earnings divided by total assets. x 3 = Earnings before interest and taxes divided

by total assets.

x 4 = Market value of equity divided by total

liabilities.

x 5 = Sales divided by total assets.Z = Overall index of corporate fiscal health.

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Index of Sustainable Growth

g*= [ p (1 ± D) (1 + L)] / [T ± P (1 ± D)

(1+L)]

where

P = Net profit before taxes/net sales x 100

D = Target dividends/profit after tax

L = Total liabilities/net worth

T = Total assets/net sales x 100

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Case Analysis

Operating 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

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Case Analysis

Economic Measures: ± Constant dollars

Dollars adjusted for inflation to make themcomparable over various years.

± CPI

± Prime interest rate Rate of interest banks charge on their lowest risk

loans. ± Gross Domestic Product (GDP)

Total output of goods and services within acountry¶s borders.

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StrategicAudit Work sheet: Part 1

Analysis CommentsStrategic Audit Heading

(+) Factors (-) Factors

I. C urrent Situation

A. Past C orporate Pe rformance Indexes

B. Strategic PostureCurrent MissionCurrent ObjectivesCurrent Strategies

Current Policies

SWOT Analysis Begins:

II. Corporate Governance

A. Board of Directors

B. Top Management

III. External Environm ent (EFAS):

Opportunities and Threats(SWOT)

A. S ocietal Environment

B. Task Environment Industry Analysis

IV. Internal Environment (IFAS):

Strengths and Weaknesses(SWOT)A. Corporate Structure

B. C orporate Culture

C. Corporate Resources

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StrategicAudit Work sheet: Part 2

Analysis CommentsStrategic Audit Heading

(+ ) Factors (-) Factors

1. M arketing

2. Finance

3. R esearch and Development

4. Operations and Logistics

5. H uman Re sources

6. Information Systems

V. Analysis of Strategic Factors(SFAS)

A. Key Internal and E xternalStrategic Factors (SWO T)

B. Re view of Mission and Objectives

SWOT Analysis Ends. Recomm endation Begins:

V I. Alternatives and Recommendations

A. Strategic Alternatives

B. Recommended Strategy

V II. Implementation

V III. Evaluation a nd C ontrol

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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 sales 2,339,406 2,254,221

²²²²² ²²²²² ²²²²² ²²²²²

Gross profits 701,817 716,405

Selling, general, and admin. 528,250 524,898

expenses

Reorganization expenses 95,000 ²²²²²² ²²²²² ²²²²² ²²²²²

Operating income 78,567 191,507

Interest expense (75,004) (75,159)

Other²net 3,983 7,069²²²²² ²²²²² ²²²²² ²²²²²

Income before taxes and

accounting changes 7,546 123,417

Income taxes (15,900) (44,400)

Income beforeaccounting changes (8,354) 79,017

Effects of accounting changes for

post-retirement benefits (307,000) ²²²²²² ²²²²² ²²²²² ²²²²²

Net income (loss) $(315,354) $79,017²²²²² ²²²²² ²²²²² ²²²²²²²²²² ²²²²² ²²²²² ²²²²²

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Prentice Hall, 2004 Chapter 14

Wheelen/Hunger

25

Case Analysis

Case Analysis Method:

Read case Read case with strategic audit

Do outside research

Begin SWOT analysis EFAS

IFAS

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concept 14

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