Analysis of Financial StatemAnalysis of Financial Statementsents

Financial statements and reportsFinancial statements and reports

Ratio analysisRatio analysis

A verbal description of the fA verbal description of the firms operating results durinirms operating results during the past yearg the past year

Discussion of new developmDiscussion of new developmentsents

Financial statementsFinancial statements

The Annual Report ProvidesThe Annual Report Provides

Key Financial StatementsKey Financial Statements

Balance sheet Balance sheet Income statementIncome statement Statement of cash flowsStatement of cash flows

2011 Cash 9,000Short-term inv. 48,600Acct Receivable 351,200Inventories 715,200 Total Current Asset 1,124,000Gross Fixed Asset 491,000Less: Depreciation 146,200 Net Fixed Asset 344,800Total assets 1,468,800

Example of Balance Sheets: Assets

Example of Balance Sheets: Liabilities Liabilities and Equityand Equity

2011Accts payable 145,600Notes payable 200,000Accruals 136,000 Total Current Liability 481,600Long-term debt 323,432Common stock 460,000Retained earnings 203,768 Total equity 663,768Total liability and equity 1,468,800

Example of Income StatementExample of Income Statement

Sales 3,432,000COGS 2,864,000Other expenses 340,000Deprecication 18,900

Tot. operating. costs 3,222,900 EBIT 209,100Interest expenses 62,500 EBT 146,600Taxes (30%) 43,980Net income 102,620

2011

EBITDA (Earnings before interest, taxes, depreciation and amortization

To measure cash earnings without accrual accounting, cancelling tax jurisdiction effects, and cancelling the effects of different capital structures.

Good to Know!!

The Statement of Cash FlowThe Statement of Cash Flows reports:s reports:

• Operating activitiesOperating activities

• Investing activitiesInvesting activities

• Financing activitiesFinancing activities

Statement of Cash FlowStatement of Cash Flowss

To determine whether a change in a balance sTo determine whether a change in a balance sheet account by using these rulesheet account by using these rules

Sources of CashIncrease in a liabilities or equity

account

- Borrowing funds or selling stock provides the firm with cash

Decrease in an asset account

- Selling inventory or collecting receivables

provides cash

Uses of CashDecrease in a liabilities or equity account

- Paying off a loan or buying back stock uses cash

Increase in an asset account

- Buying fixed assets or buying more

inventory uses cash.

2011 Statement of Cash Flows

Cash flow from operating activities:

Net income $ 44,220 Additions (sources of cash):

Depreciation 20,000 Incr. in accruals 4,000 Incr. in accounts payable 29,600

Subtractions (uses of cash):Incr. in receivables (50,800)Incr. in inventories ( 120,800)

NCF from operations ($ 73,780)

Cash flow from investing activities:

Investment in fixed assets ($ 36,000)

Increase in notes payable $ 25,000 Increase in L-T debt 101,180 Common dividends ( 22,000)NCF from financing $104,180

Net increase (decr.) in cash ($ 5,600)Cash at beginning of year 57,600 Cash at end of year $ 52,000

Cash flow from financing activities:

Management Reports Daily Revenue Report Daily Payroll Cost Report Rooms Revenue Forecast Food and Beverage Menu

Abstract Accounts Receivable Aging

Schedule

Daily Revenue Report

 ALL SPORTS RESORT

 As of Friday, 11/10/2008

  Today   KEY METRICS 

Period-to-Date

Actual Budget Last Year   Actual Budget Last Year

70.3% 90.4% 91.8% TOTAL OCCUPANCY % 70.4% 80.0% 72.2%

76.8% 91.2% 92.5% AVAILABLE OCCUPANCY % 76.7% 80.6% 73.4%

391 391 391 TOTAL ROOMS 10,948 10,948 10,948

275 353 359 ROOMS SOLD 7,706 8,753 7,900

279 357 362 OCCUPIED ROOMS 7,818 8,835 7,971

4 3 4 COMPLIMENTARY ROOMS 112 82 74

112 34 28 VACANT ROOMS 3,130 2,113 2,974

358 388 388 AVAILABLE ROOMS 10,052 10,866 10,758

46.40 77.83 65.42 REVPAR 65.97 73.29 67.78

248 N/A 267 ARRIVALS 4,382 N/A 4,382

122 N/A 218 DEPARTURES 4,149 N/A 4,087

522 N/A 636 GUESTS 9,482 N/A 9,734

46 78 136 ROOMS SOLD-Transient 3,243 4,297 4,212

172 220 183 ROOMS SOLD-Group 3,131 2,870 2,365

57 59 39 ROOMS SOLD-Contract 1,332 1,586 1,335

85.61 111.06 81.29 AVERAGE RATE- Transient 117.97 111.06 113.44

66.14 85.41 72.09 AVERAGE RATE- Group 87.04 85.40 89.72

49.23 49.34 47.18 AVERAGE RATE- Contract 48.57 49.34 49.00

Daily Payroll Cost ReportDaily Payroll Report

Florencia Hotel and Conference Center

Date: 6/5/2008

Daily Month-to-Date

Rooms Regular Overtime Total Payroll $ % Regular Overtime Hours Payroll $ Payroll % Budgeted %

Front Desk 38.10 0.00 38.10 $565.79 2.10% 671.98 1.67 673.65 $9,930.64 3.99% 3.49%

Reservations 13.03 0.00 13.03 $206.70 0.77% 269.27 14.66 283.93 $4,131.34 1.66% 1.74%

Guest Services 22.03 0.00 22.03 $252.39 0.94% 338.09 15.84 353.93 $4,412.27 1.77% 1.98%

Housekeeping 85.70 0.00 85.70 $905.15 3.35% 1,685.39 125.35 1,810.74 $19,480.01 7.82% 9.50%

Management 0.00 0.00 0.00 $0.00 0.00% 0.00 0.00 0.00 $0.00 0.00% 0.30%

Total Rooms 158.86 0.00 158.86 $1,930.03 7.15% 2,964.73 157.52 3,122.25 $37,954.26 15.24% 16.70%

Daily Month-to-Date Budget

Rooms Regular Overtime Total Payroll $ Cost/Room Regular Overtime Hours Payroll $ Cost/Room Cost/Room

Front Desk 38.10 0.00 38.10 $565.79 $3.93 671.98 1.67 673.65 $9,930.64 $6.23 $5.29

Reservations 13.03 0.00 13.03 $206.70 $1.44 269.27 14.66 283.93 $4,131.34 $2.59 $2.64

Guest Services 22.03 0.00 22.03 $252.39 $1.75 338.09 15.84 353.93 $4,412.27 $2.77 $3.00

Housekeeping 85.70 0.00 85.70 $905.15 $6.29 1,685.39 125.35 1,810.74 $19,480.01 $12.23 $14.43

Management 0.00 0.00 0.00 $0.00 $0.00 0.00 0.00 0.00 $0.00 $0.00 $0.45

Total Rooms 158.86 0.00 158.86 $1,930.03 $13.40 2,964.73 157.52 3,122.25 $37,954.26 $23.83 $25.36

Rooms Revenue Forecast

FORECAST: as of 11/30/08

City: Los Angeles

Property: Huntington - Airport

# Rooms: 86

Division: Rooms Huntington Los Angeles Airport

12-Day Forecast Report 12/1/08 12/2/08 12/3/08 12/4/08 12/5/08 12/6/08 12/7/08 12/8/08 12/9/0812/10/00

8 12/11/08 12/12/08

Avail Rooms 86 86 86 86 86 86 86 86 86 86 86 86

Forecast # 55 53 26 25 36 48 46 53 53 65 23 23

Forecast Occupancy % 63.95% 61.63% 30.23% 29.07% 41.86% 55.81% 53.49% 61.63% 61.63% 75.58% 26.74% 26.74%

Net Rooms Revenues 6215 5313 2653 2724 4050 5272 4741 5313 5157 6153 2300 2473

Average Rate $113.00 $ 100.25 $ 102.04 $ 108.96 $ 112.50 $ 109.83 $ 103.07 $ 100.25 $ 97.30 $ 94.66 $ 100.00 $ 107.52

Food and Beverage Menu Abstract

        Food Menu Abstract  

  Date: January-March, 2008

Restaurant: Mexicana Cantina     Meal Period: Lunch  

                 

Menu Item Name Number Menu Item Item Item Menu Menu Menu

  Sold Mix Food Selling CM Costs Revenues CM

  (MM) % Cost Price (E - D) (D * B) (E * B) (F * B)

Bean, Cheese and Jalapeno Nachos 170 1.21% $2.44 $7.25 $4.81 $414.80 $1,232.50 $817.70

Beef, Bean, Cheese and Jalapeno Nachos 180 1.29% $2.78 $8.50 $5.72 $500.40 $1,530.00 $1,029.60

Chicken Fajita, Bean, Cheese and Jalapeno Nachos 222 1.59% $2.83 $9.95 $7.12 $628.26 $2,208.90 $1,580.64

Beef Fajita, Bean, Cheese and Jalapeno Nachos 253 1.81% $3.28 $9.95 $6.67 $829.84 $2,517.35 $1,687.51

Cheese Quesadillas 195 1.39% $1.64 $7.75 $6.11 $319.80 $1,511.25 $1,191.45

Chicken Fajita Quesadillas 286 2.04% $2.02 $8.95 $6.93 $577.72 $2,559.70 $1,981.98

Beef Fajita Quesadillas 259 1.85% $2.48 $8.95 $6.47 $642.32 $2,318.05 $1,675.73

Shrimp and Scallop Quesadillas 158 1.13% $3.82 $11.50 $7.68 $603.56 $1,817.00 $1,213.44

Shrimp Quesadillas 176 1.26% $3.44 $11.50 $8.06 $605.44 $2,024.00 $1,418.56

Spinach Quesadillas 125 0.89% $1.83 $8.50 $6.67 $228.75 $1,062.50 $833.75

Mixed Vegetable Quesadillas 91 0.65% $1.75 $8.50 $6.75 $159.25 $773.50 $614.25

Mixed Vegetable Queso Flameado 37 0.26% $1.24 $7.50 $6.26 $45.88 $277.50 $231.62

Accounts Receivable Aging Schedule

Aging Schedule for Hanover Country Club

Members Total Number of Days Past Due

1-30 31-60 61-90 Over 90

C. DeCarlo $200 $200

T. Vangard $450 $450

J. Samuel $100 $100

F. Engel $320 $320

M. Pratel $335 $335

M. Morgan $600 $600

Others $26,875 $14,000 $10,000 $1,000 $200 1,675

Total $28,880 $14,200 $10,450 $1,600 $535 $2,095

Estimated uncollectible 1.5% 2.0% 10% 20% 40%

Total Bad Debts $1,527 $213 $209 $160 $107 $838

LiquidityLiquidity Asset managementAsset management Debt managementDebt management ProfitabilityProfitability Market valueMarket value

Ratio Analysis CategoriesRatio Analysis Categories

Liquidity = the ability of a firm to meet its sLiquidity = the ability of a firm to meet its short-term obligations as they come due.hort-term obligations as they come due.

Liquidity analysis requires use of a forecastLiquidity analysis requires use of a forecasted cash budget but ratio analysis provides sed cash budget but ratio analysis provides some quick measures of liquidityome quick measures of liquidity ..

Current ratio = . Current ratio = . CACACLCL

Measures of LiquidityMeasures of Liquidity

To indicate the ext To indicate the ext ent to which the cl ent to which the cl

- aims of S T credito - aims of S T credito rs are covered by a rs are covered by a

ssets that will soo ssets that will soo n be converted to c n be converted to c

ashash

To measure how qui To measure how qui ck the firm can pay o ck the firm can pay o

- ff S T debt without li - ff S T debt without li quidating inventorie quidating inventorie

ss

Quick ratio = .Quick ratio = .CA - Inv.CA - Inv.CLCL

Current ratio = . CACL

Quick ratio = . CA - Inv.

CL

CurrentQuick

2.3x0.8x

2.4x0.8x

2.7x1.0x

2010 2011 Industry

A little weaker than average.

Inventory turnover ratioInventory turnover ratio Days sales outstanding (accountDays sales outstanding (account

s receivable)s receivable) Fixed assets turnoverFixed assets turnover Total assets turnoverTotal assets turnover

Asset Management RatiosAsset Management Ratios

SalesInventory

20104.8x

20114.6x

Industry7.0x

Low inventory turnover--excessinventory for current level of sales.

Inventory turnover = .

(To indicate whether a firm carri (To indicate whether a firm carri es too many inventories and wh es too many inventories and wh

ether it manages inventories eff ether it manages inventories effectively.)ectively.)

Sales prices include Sales prices include markupsmarkups but inventories carried but inventories carried at cost.at cost.

SalesSales occur throughout the year occur throughout the year, but inventory is at , but inventory is at a particular point in time.a particular point in time.

Differences in Differences in accounting methods accounting methods may make compmay make comparisons difficult (e.g. LIFO vs. FIFO).arisons difficult (e.g. LIFO vs. FIFO).

Problems with Inventory TurnoverProblems with Inventory TurnoverMeasurementMeasurement

Days Sales Outstanding (DSO) is the average number of days the firm must wait after making a sale before it receives cash.

DSO = Receivables Sales/day

.

2011 DSO =$402,000

$3,850,000/360

= 37.59 days.

DSODSO 36.836.8 37.637.6 32.032.0

20102010 20112011 IndustryIndustry

High DSO--firm is collecting too slowly or has overly liberal credit terms.

Fixed assets turnover = .Sales

Fixed assets

[ To show how effective the f [ To show how effective the f irms utilizes its fixed assets irms utilizes its fixed assets

to generate sales.] to generate sales.]Total assets turnover = .

SalesTA

[To indicate the extent to [To indicate the extent to which a firm uses its total which a firm uses its total

resources to generate sal resources to generate sales.]es.]

FATOTATO

10.0 2.3

10.7 2.3

10.7 2.6

2010 2011 Industry

Fixed assets turnover OK, but totalassets turnover is low--indicates problem with current assets (inventory and receivables).

Debt ratio (balance sheet)Debt ratio (balance sheet) Debt/equity ratio (balance sheet)Debt/equity ratio (balance sheet) Times interest earned (income stateTimes interest earned (income state

ment)ment) Fixed charge coverage (income stateFixed charge coverage (income state

ment)ment)

Debt Management RatiosDebt Management Ratios

Debt ratio = = . Debt ratio = = . DDAA

DDD + ED + E

Debt/equity = .Debt/equity = .

Debt Management RatiosDebt Management Ratios

DD

EE

[It measures the proportion o [It measures the proportion o f a firm’s total assets that is f f a firm’s total assets that is f

inanced with creditors’ funds inanced with creditors’ funds.].]

[It is similar to debt ratio and rel [It is similar to debt ratio and rel ates the amount of a firm’s debt ates the amount of a firm’s debt

financing to the amount of equit financing to the amount of equit y financing.] y financing.]

and Equity multiplier = A/Eand Equity multiplier = A/E

= 1/(1 - D/A).= 1/(1 - D/A).

Times interest earned (TIE)

EBIT Interest charges= .

[It tells the extent to which the f [It tells the extent to which the f irm’s current earnings are able irm’s current earnings are able

to meet current interest payme to meet current interest payments.]nts.]

DRTIE

54.8% 3.3

58.4% 2.0

50.0% 2.5

2010 2011 Industry

Debt ratio high, TIE low and falling.

Debt is risky; would have high kd.

Profitability RatiosProfitability Ratios

Profit margin (PM)Profit margin (PM) Basic earning power (BEP)Basic earning power (BEP) Return on assets (ROA)Return on assets (ROA) Return on equity (ROE)Return on equity (ROE) Return on investors capital (ROC)Return on investors capital (ROC)

PM = .NISales

2010

2.6%

2011

1.1%

Industry

3.5%

Indicates: Sales prices are low and/orcosts are high.

[ It gives the profit per [ It gives the profit per dollar of sales.] dollar of sales.]

BEP = .EBITTA

2010

14.2%

2011

9.1%

Industry

19.1%

Indicates: Firm is doing a poor job of generating earnings from its assets.

[It shows the raw earning p [It shows the raw earning p ower of the firm’s assets, b ower of the firm’s assets, b efore influence of taxes and efore influence of taxes and

leverage. ] leverage. ]

ROA = . NITA

ROE = .NI

Common equity

[It measures [It measures a firm’s net i a firm’s net i

ncome in rela ncome in rela tion to the to tion to the to

tal asset inve tal asset investment.]stment.]

[It measures the r [It measures the r ate of return that ate of return that the firm earns on the firm earns on

stockholders’ equ stockholders’ equity.]ity.]

ROAROAROEROE

6.0%6.0%13.3%13.3%

2.7%2.7%6.4%6.4%

9.1%9.1%18.2%18.2%

20201100 20201111 IndustryIndustry

All profitability measures are low and All profitability measures are low and falling.falling.High inventory, A/R levels lead to low High inventory, A/R levels lead to low profits.profits.

Profitability Ratios SummaryProfitability Ratios Summary

P/E = .P/E = .Price/SharePrice/Share

Earnings/ShareEarnings/Share

Book value/Share = .Book value/Share = .Common equityCommon equity

# Shares# Shares

Market/Book = .Market/Book = .Price/SharePrice/Share

Book value/ShareBook value/Share

Market Value RatiosMarket Value Ratios

[The price the market places on [The price the market places on $1 of a firm’s earnings.] $1 of a firm’s earnings.]

[The higher the rate of return a fir [The higher the rate of return a fir m is earning on its common equity m is earning on its common equity

relative to the return required by i relative to the return required by i nvestors (the cost of common equi nvestors (the cost of common equi

ty), the higher will be the M/B.] ty), the higher will be the M/B.]

P/EP/EM/BM/BP/EP/EM/BM/B

9.7%9.7%1.31.39.7%9.7%1.31.3

13.6%13.6% 0.90.913.6%13.6% 0.90.9

14.2%14.2% 1.41.414.2%14.2% 1.41.4

2020110020201100 2020111120201111 IndustryIndustryIndustryIndustry

P/E ratios can rise if a decline in EPS iP/E ratios can rise if a decline in EPS is not expected to be permanent.s not expected to be permanent.

M/B ratio is low. “Normalized” P/E proM/B ratio is low. “Normalized” P/E probably low too.bably low too.

ROEROE = x x = x x Profit Profit marginmargin

Total assetTotal asset turnoverturnover

Equity Equity multipliermultiplier

NINIEE

NINISS

SSTATA

TATAEE

= x x .= x x .

Use the Du Pont Equation to get an oveUse the Du Pont Equation to get an overview of the firm’s financial positionrview of the firm’s financial position

ProfitabilityProfitability measured by ROE measured by ROE Expense control Expense control measured by PMmeasured by PM Asset utilization Asset utilization measured by TATOmeasured by TATO Financial leverage measured by EM (Financial leverage measured by EM (debt utilizatidebt utilizati

onon)) The interaction between the determinants of ROEThe interaction between the determinants of ROE

Du Pont Equation Provides an OverviewDu Pont Equation Provides an Overview

ROEROE = PM x TATO x EM = PM x TATO x EM

20201100

20201111

IND.IND.

13.30% 13.30% 2.60 2.3 2.22.60 2.3 2.2

6.40% 6.40% 1.15 2.3 2.41.15 2.3 2.4

18.20% 18.20% 3.50 2.6 2.03.50 2.6 2.0

Converting income statement and balance sheet valueConverting income statement and balance sheet values into % to facilitate comparison between firms of difs into % to facilitate comparison between firms of different sizes and firms over time.ferent sizes and firms over time. Income statementIncome statement: Divide by sales.: Divide by sales. Balance sheetBalance sheet: Divide by total assets.: Divide by total assets.

Used to supplement ratio analysis.Used to supplement ratio analysis.

What is common size analysis?What is common size analysis?

Readers of Financial Analysis

OwnersOwners Track and evaluate management’s performanceTrack and evaluate management’s performance

LendersLenders Determine the risk of the business defaulting on its loanDetermine the risk of the business defaulting on its loan

ManagersManagers Compare actual and budgeted resultsCompare actual and budgeted results

GovernmentGovernment Ensure that taxes have been paidEnsure that taxes have been paid

Readers of Financial Analysis cont.

SuppliersSuppliers Evaluate the company’s ability to pay its obligationsEvaluate the company’s ability to pay its obligations

Investment Investment AnalystsAnalysts Evaluate the company’s performanceEvaluate the company’s performance

Mergers and Mergers and AcquisitionsAcquisitions

Highlight financial strengths, upside potential, and future Highlight financial strengths, upside potential, and future valuevalue

Types of Analysis Vertical Analysis

Used to analyze variable expenses

All accounts are sized using either:

Total revenue orDepartmental revenue

Variable expenses should increase or decrease with the level of sales

Management Decision Making Employee Scheduling

Based on:Accurate revenue forecasts

Productivity goalsCustomer service goals

Management Decision Making Food and Beverage Pricing

Track sales of each menu item

Calculate each items gross profitability

Set menu prices Remove unprofitable items

from the menu

Management Decision Making

Revenue Management Goal is to maximize RevPAR

RevPar= Rooms Revenue/Rooms Available Rooms revenue = the revenue

generated by room sales Rooms Available= the number of

rooms available for sale in the time period

Management Decision Making Revenue Management

StrategiesClose lower levels of

pricing during high demand

Open all pricing levels during times of low demand

Management Decision Making Profit Flexing

Utilized when revenues fall behind budget

Adjust pricing and reduce expenses

Without impacting customer service

Maximize remaining revenue opportunities

Management Decision Making Cost-volume-profit Modeling

Also known as Breakeven Analysis

Target the amount of revenue required to reach the owner’s goal

Cost-volume-profit Equations

Breakeven Volume of Sales =Breakeven Volume of Sales = Fixed costsFixed costs

(sale price – variable cost)(sale price – variable cost)

Desired Occupancy % =Desired Occupancy % =Rooms soldRooms sold

Rooms available for saleRooms available for sale

Desired Volume = Desired Volume = Fixed Costs + Desired ProfitsFixed Costs + Desired Profits

Sale Price – Variable CostSale Price – Variable Cost

Breakeven Volume Example Sale price = $250 a night Fixed costs = $40,000 per month Variable cost = $35 per room

Breakeven Volume of Sales =Breakeven Volume of Sales =Fixed costsFixed costs

(sale price – variable cost)(sale price – variable cost)

==40,00040,000

(250 - 35)(250 - 35)

==40,00040,000

215215

== 186 rooms186 rooms