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8/6/2019 Sample Fin Analysis
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Trend Percentages ExampleWheeler, Inc. provides you with the following
operating data and asks that you prepare atrend analysis.
Wheeler, Inc.Operating Data
1999 1998 1997 1996 1995Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$
Expenses 2,033 1,966 1,870 1,803 1,701 Net income 372$ 278$ 242$ 188$ 119$
$1,991$1,991 -- $1,820 = $171$1,820 = $171
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Trend Percentages ExampleUsing 1995 as the base year, we develop the
following percentage relationships.
Wheeler, Inc.Operating Data1999 1998 1997 1996 1995
Revenues 132% 123% 116% 109% 100%Expenses 120% 116% 110% 106% 100%Net income 313% 234% 203% 158% 100%
$1,991$1,991 -- $1,820 = $171$1,820 = $171$171$171 $1,820 = 9% rounded$1,820 = 9% rounded
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CHA PTER 17CHA PTER 17ANALYSIS AND
INTERPRETATION O FF INANCIAL STATEMENTS
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CLOVER CORPORATIONComparative Balance SheetsDecember 31, 1999 and 1998
Increa se (Decrease)1999 1998 Amount %
Liabilities and Stockholders' EquityCurrent liabilities:
Accounts payable 67,000$ 44,000$ 23,000$ 52.3Notes payable 3,000 6,000 (3,000) (50.0)
Total current liabilities 70,000 50,000 20,000 40.0Long-term liabilities:
Bonds payable, 8% 75,000 80,000 (5,000) (6.3)Total liabilities 145,000 130,000 15,000 11.5
Stockholders' equity:Preferred stock 20,000 20,000 - 0.0
Common stock 60,000 60,000 - 0.0Additional paid-in capital 10,000 10,000 - 0.0
Total paid-in capital 90,000 90,000 - 0.0Retained earnings 80,000 69,700 10,300 14.8
Total stockholders' equity 170,000 159,700 10,300 6.4Total liabilities and stockholders' equity 315,000$ 289,700$ 25,300$ 8.7
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Now, lets apply theproce d res to theincome statement.
H orizontal A nalysis Example
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CLOVER CORPORA T ONComparative Income Statem ents
For the Years Ended December 31, 1999 and 1998Increase (Decrease)
1999 1998 Amount %Net sales 520,000$ 480,000$ 40,000$ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3Gross margin 160,000 165,000 (5,000) (3.0)Operating expenses 128,600 126,000 2,600 2.1Net operating income 31,400 39,000 (7,600) (19.5)Interest expense 6,400 7,000 (600) (8.6)Net income before taxes 25,000 32,000 (7,000) (21.9)Less income taxes (30%) 7,500 9,600 (2,100) (21.9)Net income 17,500$ 22,400$ (4,900)$ (21.9)
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CLOVER CORPORA TIONComparative Income Statem ents
For the Years Ended December 31, 1999 and 1998Increase (Decrease)
1999 1998 Amount %Net sales 520,000$ 480,000$ 40,000$ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3Gross margin 160,000 165,000 (5,000) (3.0)Operating expenses 128,600 126,000 2,600 2.1Net operating income 31,400 39,000 (7,600) (19.5)Interest expense 6,400 7,000 (600) (8.6)Net income before taxes 25,000 32,000 (7,000) (21.9)Less income taxes (30%) 7,500 9,600 (2,100) (21.9)Net income 17,500$ 22,400$ (4,900)$ (21.9)
Sales increased b y 8.3% while net
income decreased b y 21.9%.
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CLOVER CORPORA TIONComparative Income Statem ents
For the Years Ended December 31, 1999 and 1998Increase (Decrease)
1999 1998 Amount %Net sales 520,000$ 480,000$ 40,000$ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3Gross margin 160,000 165,000 (5,000) (3.0)Operating expenses 128,600 126,000 2,600 2.1Net operating income 31,400 39,000 (7,600) (19.5)Interest expense 6,400 7,000 (600) (8.6)Net income before taxes 25,000 32,000 (7,000) (21.9)Less income taxes (30%) 7,500 9,600 (2,100) (21.9)Net income 17,500$ 22,400$ (4,900)$ (21.9)
There w ere increases in both cost of goodssold (14.3%) and operating expenses (2.1%).These increased costs more than offset the
increase in sales, yielding an overalldecrease in net income.
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Vertical A nalysis ExampleThe management of Sample C ompany asks
you to prepare a vertical analysisvertical analysis for thecomparative balance sheets of the company.
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Samp l mpanyBa lance Shee t ( e t )
t ecember , and f ta l e t
ash 82 , , 8%Acc ts . ec . 20 ,000 00 ,000 25% 26%Inven t ry 87 ,000 82 ,000 8% 21%
Land 101 ,000 0,000 21% 23%Equ ipmen t 110 ,000 100 ,000 23% 26%Accum . epr . (17 ,000 ) (15 ,000 ) - % - %
ta l 83 ,000$ 387 ,000$ 100% 100%
Vertical A nalysis Example
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Vertical A nalysis ExampleSamp le mpany
Ba lance Shee t (Asse ts )At ecember 31 , 1999 and 1998
% f ta l Asse ts1999 1998 1999 1998
Cash 82 ,000$ 30 ,000$ 17% 8%Acc ts . ec . 120 ,000 100 ,000 25% 26%Inven t ry 87 ,000 82 ,000 18% 21%
Land 101 ,000 90 ,000 21% 23%Equ ipmen t 110 ,000 100 ,000 23% 26%Accum . epr . (17 ,000 ) (15 ,000 ) - % - %
ta l 83 ,000$ 387 ,000$ 100% 100%
$82 ,000 $483 ,000 = 17% rounded$30 ,000 $387 ,000 = 8% rounded
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Sample CompanyBalance Sheet (Liabilities & Stockholders' Equity)
At December 31, 1999 and 1998% of Total Assets
1999 1998 1999 1998Acts. Payable 76,000$ 60,000$ 16% 16%Wages Payable 33,000 17,000 7% 4%Notes Payable 50,000 50,000 10% 13%
Common Stock 170,000 160,000 35% 41%Retained Earnings 154,000 100,000 32% 26%Total 483,000$ 387,000$ 100% 100%
Vertical A nalysis Example
$76,000 $483,000 = 16% rounded
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Trend Percentages ExampleWheeler, Inc. provides you with the following
operating data and asks that you prepare atrend analysis.
Wheeler, Inc.Operating Data
1999 1998 1997 1996 1995Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$
Expenses 2,033 1,966 1,870 1,803 1,701 Net income 372$ 278$ 242$ 188$ 119$
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Trend Percentages ExampleWheeler, Inc. provides you with the following
operating data and asks that you prepare atrend analysis.
Wheeler, Inc.Operating Data
1999 1998 1997 1996 1995Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$
Expenses 2,033 1,966 1,870 1,803 1,701 Net income 372$ 278$ 242$ 188$ 119$
$1,991$1,991 -- $1,820 = $171$1,820 = $171
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Trend Percentages ExampleUsing 1995 as the base year, we develop the
following percentage relationships.Wheeler, Inc.
Operating Data1999 1998 1997 1996 1995
Revenues 132% 123% 116% 109% 100%Expenses 120% 116% 110% 106% 100%Net income 313% 234% 203% 158% 100%
$1,991$1,991 -- $1,820 = $171$1,820 = $171$171$171 $1,820 = 9% rounded$1,820 = 9% rounded
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90
100
110
120
130
140
1995 1996 1997 1998 1999
Years
% o
f 1 0 0 B a s e
Sales
Expenses
Tre n d lin efor Sa les
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Ratios can be expressed in three differentways:
1. Ratio (e.g., current ratio of 2:1)2. % (e.g., profit margin of 2%)3. $ (e.g., EPS of $2.25)
CAUTION!Using ratios and percentages without
considering the underlying causes may behazardous to your health!
lead to incorrect conclusions.
Ratios
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C ategories of Ratios
Liquidity RatiosIndicate a companys short-termdebt-paying ability
Equity (Long-Term Solvency) RatiosShow relationship between debt and equityfinancing in a company
Profitability TestsRelate income to other variables
Market TestsH elp assess relative merits of stocks in the
marketplace
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Liquidity RatiosC urrent (working capital) ratioA
cid-test (quick) ratio C ash flow liquidity ratioA ccounts receivable turnover Number of days sales in accountsreceivable
Inventory turnover Total assets turnover
651
10 Ratios You Must Know
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Equity (Long-Term Solvency) RatiosEquity (stockholders equity) ratio
Equity to debt
10 Ratios You Must Know
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Profitability Tests Return on operating assets
Net income to net sales (return onsales or profit marginprofit margin)Return on average commonstockholders equity (ROEROE)
C ash flow marginEarnings per share
Times interest earned
Times preferred dividends earned
$
10 Ratios You Must Know
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Market Tests Earnings yield on common stock
Price-earnings ratio Payout ratio on common stock Dividend yield on common stock Dividend yield on preferred stock C ash flow per share of common
stock
10 Ratios You Must Know
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Now, lets look atNorton
Corporations 1999 an d 1998 financial
statements.
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NOR TON CORPORA TIONBalance Shee ts
December 31, 1999 and 1998
1999 1998Assets
Current assets:Cash 30,000$ 20,000$Accounts receivable, net 20,000 17,000 Inventory 12,000 10,000
Prepaid expenses 3,000 2,000
Total current assets 65,000 49,000 Property and e quipment:
Land 165,000 123,000
Buildings and equipment, net 116,390 128,000
Total property and equipment 281,390 251,000
Total assets 346,390$ 300,000$
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NOR T ON CORPORA TI ONBalance S heets
December 3 1 , 1999 an d 19981999 1998
L iabilities an d S tockhol d ers ' EquityCurrent liabilities:
Accounts payable 3 9 ,000$ 40,000$
Notes payable , short -term 3,000 2,000 T otal current liabilities 42,000 42,000
L ong -term lia bilities:Notes payable, long -term 70,000 78 ,000
T otal liabilities 11 2,000 1 20,000 S tockhol d ers ' equity:
Common stock, $1 par value 27,400 1 7,000
Add itional pa i d -in capital 158 ,1 00 11 3,000 T otal pa i d -in capital 185 ,5 00 1 30,000
Retaine d earnings 4 8 ,89 0 5 0,000 T otal stockhol d ers ' equity 234,3 9 0 18 0,000
T otal liabilities an d stockhol d ers ' equity 34 6 ,3 9 0$ 300,000$
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Now, lets calculatethe 1 0 ratios base d
on Nortons financialstatements.
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N RT N C RP RA TIO N
1999
Cash 30 ,000$ Accoun ts r ece ivab le , ne t
Beg inn ing o f yea r 17 ,000
End o f yea r 20 ,000 In ven to r y
Beg inn ing o f yea r 10 ,000
End o f yea r 12 ,000
To ta l cu rr en t asse ts 65 ,000 To ta l cu rr en t liab ilities 42 ,000
Sa les on accoun t 494 ,000
Cos t o f goods so ld 140 ,000
We willuse this
informationto calculate
the liquidityratios for Norton.
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Working C apital*
12/31/99Curren t asse ts 65 ,000$
Curren t li ab ilities (42 ,000 ) Work ing cap ita l 23 ,000$
The excess of current assets over currentliabilities.
* While this is not a ratio, it does give an
indication of a companys liquidity.
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C urrent (Working C apital)Ratio
CurrentRatio
$65 ,000$42,000
= = 1 .55 : 1
M easures the abilityof the company to pay current
d ebts as they become due.
Current
Ratio
Current Assets
Current L iabilities=
#1#1
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A cid-Test (Quick) Ratio
Quick Assets
Current L iabilities=Aci d -
Test
RatioQuick assets are Cash,M arketable S ecurities,
Accounts Receivable (net) an d
current Notes Receivable.
#2#2
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Quick Assets
Current L iabilities=Aci d -
Test
RatioNorton Corporations quick
assets consist of cash of $30,000 an d accounts
receivable of $20,000.
A cid-Test (Quick) Ratio#2#2
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Quick Assets
Current L iabilities=Aci d -
Test
Ratio$5 0,000$42,000 =
1 .19 : 1=Aci d -Test
Ratio
A cid-Test (Quick) Ratio#2#2
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S ales on Account
Average Accounts Receivable
AccountsReceivable
Turnover =
A ccounts ReceivableTurnover
= 26 .70 times$49 4,000
($1 7,000 + $20,000) 2
AccountsReceivable
Turnover =
T his ratio measures how manytimes a company converts its
receivables into cash each year.
#3#3 Average, net accountsreceivable
Net, cre d it sales
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Number of Days Salesin A ccounts Receivable
M easures, on average, how manydays it takes to collect an
account receivable.
Days S alesin Accounts
Receivables
= 365 Days
Accounts Receivable Turnover
= 1 3. 6 7 days=365 Days
26 .70 T imes
Days S alesin AccountsReceivables
#4#4
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Number of Days Salesin A ccounts Receivable
In practice, woul d 45 d ays be adesirable number of days in
receivables?
#4#4Days S alesin Accounts
Receivables
= 365 Days
Accounts Receivable Turnover
= 1 3. 6 7 days=365 Days
26 .70 T imes
Days S alesin AccountsReceivables
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Inventory Turnover
Cost of Goo d s S ol d Average Inventory
InventoryTurnover
=
oul d 5 be adesirable number of timesfor inventory to turnover?
= 1 2.73 times$1 40,000
($1 0,000 + $1 2,000) 2InventoryTurnover
=
#5#5
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Equity, or LongTermSolvency Ratios
This is part of the information to calculatethe equity, or long-term solvency ratios of
Norton C orporation.
NORTON CORPORATION
1999
Net operating income 84,000$Net sales 494,000 Interest expense 7,300 Total stockholders' equity 234,390
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NORTON COR P ORATION1999
Co mm o n sh s o u sta nd ng
Begi nn in g of year 17,000 End of year 27,400
Net i n o m e 53,690$
Stock h ol d ers' eq u ity
Begi nn in g of year 180,000 End of year 234,390
Divid e nd s per s h are 2
Dec. 31 m arket price/s h are 20
In terest expe n se 7,300
Total assets
Begi nn in g of year 300,000
End of year 346,390
Here is t h erest of t h e
in for m atio nw e w ill
u se.
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A/ K/A Return on Sales or Profit
Margin
Net Incometo
Net S ales= Net
Income
Net S ales
Net Incometo
Net S ales= $
5 3, 69 0$49 4,000 =
1 0. 9 %
M easures the proportion of the sales d ollar which is retaine d as profit.
#7#7
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A/ K/A Return on Sales or Profit
Margin
Net Incometo
Net S ales= Net
Income
Net S ales
Net Incometo
Net S ales= $
5 3, 69 0$49 4,000 =
1 0. 9 %
Woul d a 1 % return on sales be goo d ?
#7#7
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Return on A verage C ommonStockholders Equity (ROE)
Return onS tockhol d ersEquity
= NetIncomeAverage Common
S tockhol d ers Equity
=$5 3, 69 0
($18 0,000 + $234,3 9 0) 2 = 25 .9 %
Return on
S tockhol dersEquityImportant measure of theincome -pro d ucing ability
of a company.
#8#8
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Earningsper S hare
Earnings Available to Common S tockhol ders
Weighte d -Average Number of CommonS hares Outstan d ing=
Earningsper S hare
$5 3, 69 0(1 7,000 + 27,400) 2= = $2.42
T he financial press regularly publishesactual an d forecaste d EP S amounts.
#9#9
Earnings Per Share
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Whats new from C hap. 15?Weighted-average calculation
EP S of common stock = _______________________Earnings available tocommon stockhol d ers
Weighte d -average number of common shares outstan d ing
6 44
T hree alternatives for calculatingweighte d -average number of shares
Earnings Per Share
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EP S of common stock = _______________________Earnings available tocommon stockhol d ers
Weighte d -average number of common shares outstan d ing
6 45
Alternate # 1
Earnings Per Share Whats new from C hap. 15?
Weighted-average calculation
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Alternate #3
Alternate #2
6 45
Earnings Per Share
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EPS and Stock Dividends or SplitsWhy restate all prior calculations of EPS?
C omparability - i.e., no additional capital wasgenerated by the dividend or split
6 46
Earnings Per Share
Primary EPS and Fully Diluted EPS APB Opinion No. 15 I mentioned this 17-page pronouncement that
required a 100-page explanation in the lecture for
chapter 13.
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Price-Earnings Ratio A/ K/A P /E Multiple
Price -EarningsRatio
M arket Price Per S hareEP S=
Price -EarningsRatio
= $20.00$ 2.42 = 8 .3 : 1
#10#10
Provi des some measure of whether thestock is un d er or overprice d .
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Important C onsiderations Need for comparable data
Data is provided by Dun &Bradstreet, Standard & Poors etc.
Must compare by industry Is EPS comparable?
Influence of external factors General business conditions Seasonal nature of business operations
Impact of inflation
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T he current ratio is a measure of liqui d ity that is compute d by d ivid ing
total assets by total liabilities.a. T rueb. False
QuestionQuestion
T he current ratio is a measure of liqui d ity, but is compute d by
d ivid ing currentcurrent assets bycurrentcurrent liabilities
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Question Quick assets are defined as C ash,
Marketable Securities and net receivables.
a. Trueb.False
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Quick assets are d efine d as Cash,M arketable S ecurities an d net
receivables.a. T rueb. False
QuestionQuestion
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No more ratios, please!
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A bout Test #1 Best way to study
Notes first Study guide and /or H ermanson tutorialsC alculators will be provided
Must wait outside classroomH
ave your questions ready for next actualclass See course home page for office hours