Upload
anqi-lee
View
217
Download
0
Embed Size (px)
Citation preview
8/4/2019 Common-Size Analysis 2
1/25
By:Hendru Chahayo, SE.
(HCO)
Common-Size Analysis
8/4/2019 Common-Size Analysis 2
2/25
Basic of common size analysis
Although company A has higher net income, it is not necessarily the more profitable when
adjusted for size. Company B had 700 (million) lower sales, but generated only 50 (million)
Less in earnings.
8/4/2019 Common-Size Analysis 2
3/25
Vertical common size incomestatement
8/4/2019 Common-Size Analysis 2
4/25
Continue
8/4/2019 Common-Size Analysis 2
5/25
8/4/2019 Common-Size Analysis 2
6/25
Summary Company B is doing better job than Company A
of controlling its product cost (has a lowerCOGS).
Company A is doing better job of controllingselling and administrative expenses.
Company As tax expense as a percentage ofrevenues is lower than Company B
8/4/2019 Common-Size Analysis 2
7/25
Continue Company A has an average tax rate 30%
(165/550).
Company B has an average tax rate of 29.5%(140/475).
It appears that Company B is doing a better job atcontrolling tax expense.
8/4/2019 Common-Size Analysis 2
8/25
Horizontal common size incomestatement
Revenues in the second year increased by 10% whereas net income increased by only
about 9%.
8/4/2019 Common-Size Analysis 2
9/25
Continue
8/4/2019 Common-Size Analysis 2
10/25
Summary COGS increased by just 8.7% whereas revenues
increased 10%.
Gross profit increased by 12.5% (more than theincrease in revenue).
Unfortunately, selling and administrative expenseincreased by 15.38%.
Earnings increased by 9.09%.
8/4/2019 Common-Size Analysis 2
11/25
Continue
8/4/2019 Common-Size Analysis 2
12/25
8/4/2019 Common-Size Analysis 2
13/25
8/4/2019 Common-Size Analysis 2
14/25
8/4/2019 Common-Size Analysis 2
15/25
8/4/2019 Common-Size Analysis 2
16/25
Fixed Costs VS Variable Costs
Company C is selling goods at $25 per unit. Cost of sales are $15 per unit.Selling and administrative cost are $6 per unit. Taxes are 30%. The companycurrently selling 50,000 units, and sales are increasing at 20% per year.
8/4/2019 Common-Size Analysis 2
17/25
Vertical common size
Note that because all expenses are variable costs and did not change (in percentageterms), the net income as a percentage of sales is constant at 11.2%.
8/4/2019 Common-Size Analysis 2
18/25
Scenario DAlthough company D is in the same industry, it has some FC as part of itsOperating structure. Selling and adm costs are $100,000 per year (fixed) plus$4 per unit (variable).
8/4/2019 Common-Size Analysis 2
19/25
Converting to common size yield
Although the net profit margin was 11.20% for both company C and company D inthe first year, company Ds net profit margin increased to 12.13% in year 2 and 12.91%in year 3.
8/4/2019 Common-Size Analysis 2
20/25
Why did this occur? Because the FC did not increase as sales grew. The companys cost structure enabled it to
leverage the 20% sales increase to a largerincrease in net income.
This is known as operating leverage.
On a horizontal basis, the 20% increase in salesyielded a 30% increase in operating income and
net income.
8/4/2019 Common-Size Analysis 2
21/25
Operating Leverage
In this case, operating leverage is 1.50 (300/200).As seen earlier, a 20% increase in sales yielded a 30% increase in operatingincome.
8/4/2019 Common-Size Analysis 2
22/25
Continue Operating leverage=
percentage change in EBIT
percentage change in revenue
This would result in the same 1.5 (30%/20%).
8/4/2019 Common-Size Analysis 2
23/25
ContinueAssume that 50% of the companys FC ($50,000)
are based on sales of less than 80,000 units.Every time sales increase cumulatively by 80,000units, an additional $50,000 of FC will be
increased . Company D had 72,000 units of sales in year 3,
so it will incur an additional $50,000 in cost inyear 4.
8/4/2019 Common-Size Analysis 2
24/25
8/4/2019 Common-Size Analysis 2
25/25