ratio analysis
TRANSCRIPT
04/12/23 Ratios 1
Financial Ratios
04/12/23 Ratios 2
Ratio Analysis
1. Measure firm performance
2. Compare over time
3. Compare with other firms or industries
4. Analyze ROE
5. Project financial statements into future
04/12/23 Ratios 3
Ratios
1. Profitability
2. Activity or Utilization
3. Liquidity
4. Leverage
5. Growth
6. Valuation
04/12/23 Ratios 4
1. Profit Margin (PM) =
2. Operating Profit Margin
(not in the book) =
3. Return on Assets
(ROA) =
4. Return on Equity
(ROE) =
05.SalesIncomeNet
10.SalesEBIT
15.Assets Total
IncomeNet
19.Equity rsStockholde
IncomeNet
Profitability Ratios
04/12/23 Ratios 5
Liquidity Ratios
Current Ratio =
Quick Ratio =
Cash Ratio =
2sLiabilitieCurrent
AssetsCurrent
1sLiabilitieCurrent
Inventory - AssetsCurrent
75.sLiabilitieCurrent
Cash
04/12/23 Ratios 6
Activity or Utilization Ratios
Receivables Turnover =
Average Collection Period =
Inventory Turnover* =
Fixed Asset Turnover =
Total Asset Turnover =
12sReceivable
(credit) Sales
30SalesCredit Daily Average
Receivable Accounts
4Inventory
COGS
2Assets Fixed
Sales
1Assets Total
Sales
InventorySales
* Sometimes =
04/12/23 Ratios 7
Leverage RatiosDebt Ratio (DR) =
Long-term Debt Ratio* =
Time Interest Earned (XIE) =
Cash Coverage =
Fixed Charge Coverage (not in the book) =
Debt to Equity =
Equity Multiplier (EM) =
*Also called Debt to Capital Ratio
50.Assets TotalDebt Total
25. Equity Debt termLong
Debt termLong
5InterestEBIT
7Interest
onDepreciati EBIT
3Charges Fixed
Taxes and Charges Fixed Before Income
0.1Equity
Debt Total
0.2Equity
Assets Total
04/12/23 Ratios 8
Growth Rates
1. Percentage growth of Sales, Net Income, etc.
Example:
2. Sustainable Growth = ROBE(1-PO)
where PO is the payout ratio = Div/NI
03
0304
Sales
SalesSalesgrowth Sales
PO)-ROE(1
04/12/23 Ratios 9
Sustainable Growth
Growth financed through:a) Internal equity fundsb) Supportable debt
Such that:a) Firm’s debt ratio is held constant
SG
(Grant’s approx.)
(Book’s formula)
Where b is the “plowback” or retention ratio
)NI
DIV-ROE(1
PO)-ROE(1
b*ROE-1b*ROE
04/12/23 Ratios 10
Valuation Ratios
Price Earnings (PE) =
Market to Book =
15shareper Earnings
shareper priceMarket
2shareper Book valueshareper priceMarket
04/12/23 Ratios 11
P/E RatioA B
EPS $5 $5
Growth High Low
Price $50 $25
P/E 10x 5x
04/12/23 Ratios 12
Price-earnings Ratios for Selected U.S. Companies
Coca-Cola . . . . . Beverages 13 17 20 25 34 53
27Disney . . . . . . Entertainment 25 20 19 26 23 38
23Liz Claiborne . . . Clothing 13 19 11 19 17 29 13McDonald’s . . . . Restaurants 10 16 18 20 24 28
22NationsBank . . . Banking 7 10 9 10 10 21
Phelps Dodge . . . Copper 6 8 4 17 7 23 35Southwest Air . . . Airlines 20 14 15 38 21 21 27Texas Utilities . . . Public Utilities 6 7 8 15 14 14
Wal-Mart . . . . . Retail 26 28 24 39 18 38 25Standard & Poor’s . . . (500 Stock Index) 11 14 15 22 17 25
20
Jan. Jan. Jan. Jan. Jan. June July Corporation Industry 1983 1986 1990 1993 1996 1998 2004
04/12/23 Ratios 13
Comparison of Market Value to Book Value per Share
CorporationJuly 2004 Market Value per Share
Ratio of Market Value to Book Value
Microsoft $ 27.95 4.64
Pfizer 32.11 3.77
Colgate-Palmolive 56.13 57.98
Oracle Corp 10.33 7.01
Monsanto 36.58 1.78
Steelcase, Inc. 13.57 1.71
Amazon, Inc. 46.02 -
Yahoo, Inc. 28.11 8.33
Wolverine Tube 11.01 .74
04/12/23 Ratios 14
Du Pont Analysis
1. ROE =
2. ROE =
=
3. ROE =
EQNI
EQAssets Total
*Assets Total
Sales*
SalesNI
Profit Margin * Total Asset Turnover * Equity Multiplier (PM) (TAT) (EQ)
DR-1TAT*PM
04/12/23 Ratios 15
Sustainable Growth and Du Pont
D eb t
N ew
R etu rn ed E arn in g s D ivid en d s
O ld (R E )
E q u ity
A sse t G row th
S a les G row thSalesAsset
Asset Equity
PATSales
1 - PO
PO) - PM(1DR - 11
TAT SG
PO) - ROE(1
04/12/23 Ratios 16
Microsoft Income Statements(in millions)
04/12/23 Ratios 17
Microsoft Balance Sheet(in millions)
1994
AssetsCurrent assets:
Cash and short-term investmentsAccounts receivable— net of allowancesInventoriesOther
Total current assetsProperty, plant, and equipment— netOther assets
Total assets
$3,614475102
1214,312
930 121
$5,363
Liabilities and stockholders’ equityCurrent liabilities:
Accounts payableAccounts compensationIncome taxes payableOther
Total current liabilitiesCommitments and contingenciesStockholders’ equity:
Common stock and paid-in capitalRetained earnings
Total stockholders’ equityTotal liabilities and stockholders’ equity
$ 32496
305 188
913
1,500 2,950 4,450
$5,363
04/12/23 Ratios 18
Wal-Mart Stores Income Statement(in thousands)
1994
Revenues:Net salesRentals from licensed departmentsOther income—net
Costs and Expenses:Cost of salesOperating, selling and general
and administrative expenses
Interest Costs:DebtCapital leases
Income Before Income TaxesProvision for Income Taxes:
CurrentDeferred
Net Income
$67,344,57447,422
593,54867,985,544
53,443,743
10,333,218
331,308 185,697 64,293,966
3,691,578
1,324,777 33,524 1,358,277
$ 2,333,277
04/12/23 Ratios 19
Wal-Mart Stores Balance Sheet (in thousands)
AssetsCurrent Assets:
Cash and cash equivalentsReceivablesRecoverable costs from sale/leasebackInventoryPrepaid expenses and other
Total Current AssetsProperty, Plant and Equipment:
LandBuildings and improvementsFixtures and equipmentTransportation equipment
Less accumulated depreciationNet property, plant, and equipmentNet property under capital leases
Other Assets and Deferred ChargesTotal Assets
1994
$ 20,115689,987208,236
11,013,706 182,558
12,114,602
2,740,8836,818,4793,980,674
259,53713,799,573
2,172,80811,626,7651,548,601
1,150,796 $26,440,764
04/12/23 Ratios 20
Wal-Mart Stores Balance Sheet (cont.)(in thousands)
1994
Liabilities and Shareholders’ EquityCurrent Liabilities:
Commercial paperAccounts payableAccrued liabilitiesAccrued federal and state income taxesLong-term debt due within one yearObligations under capital leases due within one year
Total Current LiabilitiesLong-Term DebtLong-Term Obligations Under Capital LeasesDeferred Income TaxesShareholders’ Equity:
Common stockCapital in excess of par valueRetained earnings
Total Shareholders’ EquityTotal Liabilities and Shareholders’ Equity
$ 1,575,0294,103,8781,473,198
183,03119,658
51,4297,406,2236,155,8941,804,300
321,909
229,877535,639
9,986,922 10,752,438 $26,440,764
04/12/23 Ratios 21
Du Pont Examples
Microsoft ROE = 24.6% * 0.867 * 1.21 = 25.7%
Wal-Mart ROE = 3.5% * 2.547 * 2.46 = 21.8%
04/12/23 Ratios 22
How Are They Doing Now?
Microsoft Wal-Mart
04/12/23 Ratios 23
Things to Consider Concerning Financial Ratios
• What aspect of the firm or its operations are we attempting to analyze?
Generally, the aspects are “fuzzy”, e.g., utilization
• What goes into a particular ratio?Historical cost? Market values? What accounting conventions?
• What is the unit of measurement?Dollars? Days? Turns?
• What would a desirable ratio value be?Always?
04/12/23 Ratios 24
Income Statement for the Year 2004Conservative High Reported Income
SalesCost of goods soldGross profitSelling and administrativeOperating profitInterest expenseExtraordinary lossIncome before taxesTaxes (30%)Net IncomeExtraordinary loss (net of tax)Net income transferred to RE
$4,000,000 3,000,000 1,000,000 450,000 550,000 50,000 100,000 400,000 120,000 280,000 --- $ 280,000
$4,200,000 2,700,000 1,500,000 450,000 1,050,000 50,000 --- 1,000,000 300,000 700,000 70,000 $630,000
Discrepancies1. Revenue recognition (i.e., installment sales and leases)2. Cost of goods sold (i.e., may use LIFO during inflation)3. Extraordinary losses
04/12/23 Ratios 25
Trends in Annual Reports Interactive On-line Reports http://
www.intel.com/intel/finance Plain Speaking
http://www.berkshirehathaway.com/2003ar/2003ar.pdf
Filings, i.e. 10k annual reports http://www.edgar-online.com/bin/esearch/fullsearch.asp