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6-1
Chapter 6Chapter 6
Financial Statement Financial Statement AnalysisAnalysis
Financial Statement Financial Statement AnalysisAnalysis
6-2
Financial Financial Statement AnalysisStatement AnalysisFinancial Financial Statement AnalysisStatement Analysis
Financial Statements
A Possible Framework for Analysis
Ratio Analysis
Trend Analysis
Common-Size and Index Analysis
Financial Statements
A Possible Framework for Analysis
Ratio Analysis
Trend Analysis
Common-Size and Index Analysis
6-3
Examples of External Uses Examples of External Uses of Statement Analysisof Statement AnalysisExamples of External Uses Examples of External Uses of Statement Analysisof Statement Analysis
Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm.
BondholdersBondholders -- Focus on the long-term cash flow of the firm.
ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm.
BondholdersBondholders -- Focus on the long-term cash flow of the firm.
ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
6-4
Examples of Internal Uses Examples of Internal Uses of Statement Analysisof Statement AnalysisExamples of Internal Uses Examples of Internal Uses of Statement Analysisof Statement Analysis
PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
ControlControl -- Focus on return on investment for various assets and asset efficiency.
UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
ControlControl -- Focus on return on investment for various assets and asset efficiency.
UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
6-5
Primary Types of Primary Types of Financial StatementsFinancial StatementsPrimary Types of Primary Types of Financial StatementsFinancial Statements
Income StatementIncome Statement A summary of a firm’s revenues and
expenses over a specified period, ending with net income or loss for the period.
Income StatementIncome Statement A summary of a firm’s revenues and
expenses over a specified period, ending with net income or loss for the period.
Balance SheetBalance Sheet A summary of a firm’s financial position on
a given date that shows total assets = total liabilities + owners’ equity.
Balance SheetBalance Sheet A summary of a firm’s financial position on
a given date that shows total assets = total liabilities + owners’ equity.
6-6
Basket Wonders’ Balance Basket Wonders’ Balance Sheet (Asset Side)Sheet (Asset Side)Basket Wonders’ Balance Basket Wonders’ Balance Sheet (Asset Side)Sheet (Asset Side)
a. How the firm stands on a specific date.
b. What BW owned.c. Amounts owed by
customers.d. Future expense items
already paid.e. Cash/likely convertible
to cash within 1 year.f. Original amount paid.g. Acc. deductions for
wear and tear.
a. How the firm stands on a specific date.
b. What BW owned.c. Amounts owed by
customers.d. Future expense items
already paid.e. Cash/likely convertible
to cash within 1 year.f. Original amount paid.g. Acc. deductions for
wear and tear.
Cash and C.E. $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Exp dd 5 Accum Tax Prepay 10 Current Assets $1,195 Current Assets $1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329)
Net Fix. AssetsNet Fix. Assets $ 701 $ 701 Investment, LT 50 Other Assets, LT 223
Total AssetsTotal Assetsbb $2,169 $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003a
6-7
Basket Wonders’ Balance Basket Wonders’ Balance Sheet (Liability Side)Sheet (Liability Side)Basket Wonders’ Balance Basket Wonders’ Balance Sheet (Liability Side)Sheet (Liability Side)
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxes dd 16 Other Accrued Liab. dd 100 Current Liab.Current Liab. ee $ $ 500 500 Long-Term Debt ff
530 Shareholders’ Equity Com. Stock ($1 par) gg 200 Add Pd in Capital gg
729 Retained Earnings hh 210 Total Total EquityEquity $ $1,1391,139 Total Liab/EquityTotal Liab/Equitya,ba,b $2,169 $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003
6-8
Basket Wonders’ Basket Wonders’ Income StatementIncome StatementBasket Wonders’ Basket Wonders’ Income StatementIncome Statement
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
Net Sales $ 2,211 Cost of Goods Sold bb 1,599
Gross Profit $ 612 SG&A Expenses c c 402 EBITd $ 210 Interest Expensee 59 EBT f f $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53 $ 53
Basket Wonders Statement of Earnings (in thousands) Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2003for Year Ending December 31, 2003a
6-9
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
Analytical Tools UsedAnalytical Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
Analytical Tools UsedAnalytical Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
Trend / Seasonal ComponentTrend / Seasonal Component
How much funding will be required in the future?
Is there a seasonal component?
Trend / Seasonal ComponentTrend / Seasonal Component
How much funding will be required in the future?
Is there a seasonal component?
6-10
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
Health of a Firm
Financial Ratios
1. Individually2. Over time3. In combination4. In comparison
Health of a Firm
Financial Ratios
1. Individually2. Over time3. In combination4. In comparison
1. Analysis of the funds needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
6-11
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
ExamplesExamples::
Volatility in sales
Volatility in costs
Proximity to break-even point
ExamplesExamples::
Volatility in sales
Volatility in costs
Proximity to break-even point
1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm.
3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
Business riskBusiness risk relates to the risk inherent in the operations of the firm.
Business riskBusiness risk relates to the risk inherent in the operations of the firm.
6-12
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
A Financial Manager
must consider all three jointly
when determining
the financing
needs of the firm.
A Financial Manager
must consider all three jointly
when determining
the financing
needs of the firm.
DeterminingDeterminingthe the
financingfinancingneeds of needs of the firm.the firm.
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
6-13
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
NegotiationsNegotiationswithwith
suppliers ofsuppliers ofcapital.capital.
DeterminingDeterminingthe the
financingfinancingneeds of needs of the firm.the firm.
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
6-14
Framework of financial Framework of financial analysisanalysis
Greater the funds requirement the greater the total requirement if financing.
Nature of the need influence the type of financing.
Greater the business risk less desirable the debt financing is.
Why equity financing is desirable in case of high business risk?
6-15
Use of Financial RatiosUse of Financial RatiosUse of Financial RatiosUse of Financial Ratios
Types of Types of ComparisonsComparisons
Internal Internal ComparisonsComparisons
External External ComparisonsComparisons
Types of Types of ComparisonsComparisons
Internal Internal ComparisonsComparisons
External External ComparisonsComparisons
A Financial Ratio is an index that relates
two accounting numbers and is
obtained by dividing one number by the
other.
6-16
Liquidity ratiosLiquidity ratios
Liquidity of a firm is measured by its ability to satisfy its short term obligations as they come due.
Liquidity refers the solvency of the firm’s overall financial position----------it means the ease with which it can pay its bills
6-17
Liquidity RatiosLiquidity RatiosLiquidity RatiosLiquidity Ratios
CurrentCurrent
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
CurrentCurrent
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
Liquidity ratios measure a firm’s ability to meet short
term obligations.Current ratio:
Shows a firm’s ability to cover its current liabilities with its current assets.
Balance Sheet Ratios
Liquidity Ratios
$1,195$1,195$500$500
= 2.392.39
6-18
Liquidity Ratio Liquidity Ratio ComparisonsComparisonsLiquidity Ratio Liquidity Ratio ComparisonsComparisons
BW Industry
2.39 2.15
2.26 2.09
1.91 2.01
BW Industry
2.39 2.15
2.26 2.09
1.91 2.01
Year
2003
2002
2001
CurrentCurrent RatioRatio
Ratio is stronger than the industry average.
6-19
Liquidity RatiosLiquidity RatiosLiquidity RatiosLiquidity Ratios
Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
Acid-Test (Quick)Shows a firm’s ability to meet current liabilities
with its most liquid assets.
Balance Sheet Ratios
Liquidity Ratios
$1,195 - $696$1,195 - $696$500$500
= 1.001.00
6-20
Liquidity Ratio Liquidity Ratio ComparisonsComparisonsLiquidity Ratio Liquidity Ratio ComparisonsComparisons
BW Industry
1.00 1.25
1.04 1.23
1.11 1.25
BW Industry
1.00 1.25
1.04 1.23
1.11 1.25
Year
2003
2002
2001
Acid-Test RatioAcid-Test Ratio
Ratio is weaker than the industry average.
6-21
Summary of the Liquidity Summary of the Liquidity Ratio ComparisonsRatio ComparisonsSummary of the Liquidity Summary of the Liquidity Ratio ComparisonsRatio Comparisons
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
Note that this industry has a relatively high level of inventories.
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
Note that this industry has a relatively high level of inventories.
RatioRatio BWBW IndustryIndustry
Current 2.39 2.15
Acid-Test 1.00 1.25
6-22
Quick (acid test )ratioQuick (acid test )ratio
This ratio is similar to current ratio except that it excludes inventory which is the least liquid asset current asset.
Low liquidity of inventory results from two primary factors
Many types of inventory cant be sold because of their partial completion, special purpose items etc.
Inventory is sold on credit ,which means that it become an account receivable before being converted into cash.
6-23
Current Ratio -- Trend Current Ratio -- Trend Analysis ComparisonAnalysis ComparisonCurrent Ratio -- Trend Current Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Current Ratio
1.5
1.7
1.9
2.1
2.3
2.5
2001 2002 2003
Analysis Year
Rat
io V
alu
e
BW
Industry
6-24
Acid-Test Ratio -- Trend Acid-Test Ratio -- Trend Analysis ComparisonAnalysis ComparisonAcid-Test Ratio -- Trend Acid-Test Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Acid-Test Ratio
0.5
0.8
1.0
1.3
1.5
2001 2002 2003
Analysis Year
Rat
io V
alu
e
BW
Industry
6-25
Summary of the Liquidity Summary of the Liquidity Trend AnalysesTrend AnalysesSummary of the Liquidity Summary of the Liquidity Trend AnalysesTrend Analyses
The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventoriesinventories are a significant problem for BWBW.
The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventoriesinventories are a significant problem for BWBW.
The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
6-26
Financial Leverage RatiosFinancial Leverage RatiosFinancial Leverage RatiosFinancial Leverage Ratios
Debt-to-EquityDebt-to-Equity
Total DebtTotal DebtShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003
Debt-to-EquityDebt-to-Equity
Total DebtTotal DebtShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003Shows the extent to
which the firm is financed by debt.
Balance Sheet Ratios
Financial LeverageRatios
$1,030$1,030$1,139$1,139
= .90.90
6-27
Debt ratioDebt ratio
The ratio tells us that creditors are providing 90 cents of financing for each $1 being provided by shareholders.
Creditors want this ratio to be low. The lower the ratio the higher the level of
financing being provided by shareholders and the more margin of protection for creditors
6-28
Financial Leverage Financial Leverage Ratio ComparisonsRatio ComparisonsFinancial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry
.90 .90
.88 .90
.81 .89
BW Industry
.90 .90
.88 .90
.81 .89
Year
2003
2002
2001
Debt-to-Equity RatioDebt-to-Equity Ratio
BW has average debt utilizationrelative to the industry average.
6-29
Financial Leverage RatiosFinancial Leverage RatiosFinancial Leverage RatiosFinancial Leverage Ratios
Debt-to-Total-AssetsDebt-to-Total-Assets
Total DebtTotal DebtTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Debt-to-Total-AssetsDebt-to-Total-Assets
Total DebtTotal DebtTotal AssetsTotal Assets
For Basket Wonders December 31, 2003Shows the percentage
of the firm’s assets that are supported by
debt financing.
Balance Sheet Ratios
Financial LeverageRatios
$1,030$1,030$2,169$2,169
= .47.47
6-30
Debt to total assetsDebt to total assets
47 percent of the firms assets are financed with debt and the remaining 53 percent of financing comes from shareholders equity.
The higher this ratio the higher the financial risk.
6-31
Financial Leverage Financial Leverage Ratio ComparisonsRatio ComparisonsFinancial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry
.47 .47
.47 .47
.45 .47
BW Industry
.47 .47
.47 .47
.45 .47
Year
2003
2002
2001
Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio
BW has average debt utilizationrelative to the industry average.
6-32
Financial Leverage RatiosFinancial Leverage RatiosFinancial Leverage RatiosFinancial Leverage Ratios
Total CapitalizationTotal Capitalization
Total DebtTotal DebtTotal CapitalizationTotal Capitalization
For Basket Wonders December 31, 2003
Total CapitalizationTotal Capitalization
Total DebtTotal DebtTotal CapitalizationTotal Capitalization
For Basket Wonders December 31, 2003
Shows the relative importance of long-term
debt to the long-term financing of the firm.
Balance Sheet Ratios
Financial LeverageRatios
$1,030$1,030$1,669$1,669
= .62.62
(i.e., LT-Debt + Equity)
6-33
Total capitalizationTotal capitalization
Total capitalization represents all long term debt and shareholders equity.
6-34
Financial Leverage Financial Leverage Ratio ComparisonsRatio ComparisonsFinancial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry
.62 .60
.62 .61
.67 .62
BW Industry
.62 .60
.62 .61
.67 .62
Year
2003
2002
2001
Total Capitalization RatioTotal Capitalization Ratio
BW has average long-term debt utilizationrelative to the industry average.
6-35
Coverage RatiosCoverage RatiosCoverage RatiosCoverage Ratios
Interest CoverageInterest Coverage
EBITEBITInterest ChargesInterest Charges
For Basket Wonders December 31, 2003
Interest CoverageInterest Coverage
EBITEBITInterest ChargesInterest Charges
For Basket Wonders December 31, 2003Indicates a firm’s
ability to cover interest charges.
Income StatementRatios
Coverage Ratios
$210$210$59$59
= 3.563.56
6-36
Coverage ratioCoverage ratio
This ratio serves as one measure of the firms ability to meet its interest payments and so avoid bankruptcy.
The higher the ratio the greater the likelihood that the company could cover its interest payments without difficulty
6-37
CoverageCoverageRatio ComparisonsRatio ComparisonsCoverageCoverageRatio ComparisonsRatio Comparisons
BW Industry
3.56 5.19
4.35 5.02
10.30 4.66
BW Industry
3.56 5.19
4.35 5.02
10.30 4.66
Year
2003
2002
2001
Interest Coverage RatioInterest Coverage Ratio
BW has below average interest coveragerelative to the industry average.
6-38
Coverage Ratio -- Trend Coverage Ratio -- Trend Analysis ComparisonAnalysis ComparisonCoverage Ratio -- Trend Coverage Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Interest Coverage Ratio
3.0
5.0
7.0
9.0
11.0
2001 2002 2003
Analysis Year
Rat
io V
alu
e
BW
Industry
6-39
Summary of the Coverage Summary of the Coverage Trend AnalysisTrend AnalysisSummary of the Coverage Summary of the Coverage Trend AnalysisTrend Analysis
This indicates that low earnings low earnings (EBIT) may be a potential problem for BWBW.
Note, we know that debt levels debt levels are in line with the industryindustry averages.
This indicates that low earnings low earnings (EBIT) may be a potential problem for BWBW.
Note, we know that debt levels debt levels are in line with the industryindustry averages.
The interest coverage ratio for BWBW has been falling since 2001. It has been below industryindustry averages for the past two years.
The interest coverage ratio for BWBW has been falling since 2001. It has been below industryindustry averages for the past two years.
6-40
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Receivable TurnoverReceivable Turnover
Annual Net Credit SalesAnnual Net Credit SalesReceivablesReceivables
For Basket Wonders December 31, 2003
Receivable TurnoverReceivable Turnover
Annual Net Credit SalesAnnual Net Credit SalesReceivablesReceivables
For Basket Wonders December 31, 2003Indicates quality of
receivables and how successful the firm is in
its collections.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$2,211$2,211$394$394
= 5.615.61
(Assume all sales are credit sales.)
6-41
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Avg Collection PeriodAvg Collection Period
Days in the YearDays in the YearReceivable TurnoverReceivable Turnover
For Basket Wonders December 31, 2003
Avg Collection PeriodAvg Collection Period
Days in the YearDays in the YearReceivable TurnoverReceivable Turnover
For Basket Wonders December 31, 2003
Average number of days that receivables are
outstanding.(or RT in days)
Income Statement /Balance Sheet
Ratios
Activity Ratios
3653655.615.61
= 65 days65 days
6-42
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
65.0 65.7
71.1 66.3
83.6 69.2
BW Industry
65.0 65.7
71.1 66.3
83.6 69.2
Year
2003
2002
2001
Average Collection PeriodAverage Collection Period
BW has improved the average collection period to that of the industry average.
6-43
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Payable Turnover (PT)Payable Turnover (PT)
Annual Credit PurchasesAnnual Credit PurchasesAccounts PayableAccounts Payable
For Basket Wonders December 31, 2003
Payable Turnover (PT)Payable Turnover (PT)
Annual Credit PurchasesAnnual Credit PurchasesAccounts PayableAccounts Payable
For Basket Wonders December 31, 2003
Indicates the promptness of payment to suppliers by the firm.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$1551$1551$94$94 = 16.516.5
(Assume annual credit purchases = $1,551.)
6-44
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
PT in DaysPT in Days
Days in the YearDays in the YearPayable TurnoverPayable Turnover
For Basket Wonders December 31, 2003
PT in DaysPT in Days
Days in the YearDays in the YearPayable TurnoverPayable Turnover
For Basket Wonders December 31, 2003
Average number of days that payables are
outstanding.
Income Statement /Balance Sheet
Ratios
Activity Ratios
36536516.516.5
= 22.1 days22.1 days
6-45
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
22.1 46.7
25.4 51.1
43.5 48.5
BW Industry
22.1 46.7
25.4 51.1
43.5 48.5
Year
2003
2002
2001
Payable Turnover in DaysPayable Turnover in Days
BW has improved the PT in Days.Is this good?Is this good?
6-46
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Inventory TurnoverInventory Turnover
Cost of Goods SoldCost of Goods SoldInventoryInventory
For Basket Wonders December 31, 2003
Inventory TurnoverInventory Turnover
Cost of Goods SoldCost of Goods SoldInventoryInventory
For Basket Wonders December 31, 2003
Indicates the effectiveness of the
inventory management practices of the firm.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$1,599$1,599$696$696
= 2.302.30
6-47
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
2.30 3.45
2.44 3.76
2.64 3.69
BW Industry
2.30 3.45
2.44 3.76
2.64 3.69
Year
2003
2002
2001
Inventory Turnover RatioInventory Turnover Ratio
BW has a very poor inventory turnover ratio.
6-48
Inventory Turnover Ratio --Inventory Turnover Ratio --Trend Analysis ComparisonTrend Analysis ComparisonInventory Turnover Ratio --Inventory Turnover Ratio --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Inventory Turnover Ratio
2.0
2.5
3.0
3.5
4.0
2001 2002 2003
Analysis Year
Rat
io V
alu
e
BW
Industry
6-49
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Total Asset TurnoverTotal Asset Turnover
Net SalesNet SalesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Total Asset TurnoverTotal Asset Turnover
Net SalesNet SalesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Indicates the overall effectiveness of the firm in utilizing its assets to
generate sales.
Income Statement /Balance Sheet
Ratios
Activity Ratios
$2,211$2,211$2,169$2,169
= 1.021.02
6-50
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
1.02 1.17
1.03 1.14
1.01 1.13
BW Industry
1.02 1.17
1.03 1.14
1.01 1.13
Year
2003
2002
2001
Total Asset Turnover RatioTotal Asset Turnover Ratio
BW has a weak total asset turnover ratio.Why is this ratio considered weak?Why is this ratio considered weak?
6-51
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Gross Profit MarginGross Profit Margin
Gross ProfitGross ProfitNet SalesNet Sales
For Basket Wonders December 31, 2003
Gross Profit MarginGross Profit Margin
Gross ProfitGross ProfitNet SalesNet Sales
For Basket Wonders December 31, 2003
Indicates the efficiency of operations and firm
pricing policies.
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$612$612$2,211$2,211
= .277277
6-52
ProfitabilityProfitabilityRatio ComparisonsRatio ComparisonsProfitabilityProfitabilityRatio ComparisonsRatio Comparisons
BW Industry
27.7% 31.1%
28.7 30.8
31.3 27.6
BW Industry
27.7% 31.1%
28.7 30.8
31.3 27.6
Year
2003
2002
2001
Gross Profit MarginGross Profit Margin
BW has a weak Gross Profit Margin.
6-53
Gross Profit Margin --Gross Profit Margin --Trend Analysis ComparisonTrend Analysis ComparisonGross Profit Margin --Gross Profit Margin --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Gross Profit Margin
25.0
27.5
30.0
32.5
35.0
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
6-54
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Net Profit MarginNet Profit Margin
Net Profit after TaxesNet Profit after TaxesNet SalesNet Sales
For Basket Wonders December 31, 2003
Net Profit MarginNet Profit Margin
Net Profit after TaxesNet Profit after TaxesNet SalesNet Sales
For Basket Wonders December 31, 2003
Indicates the firm’s profitability after taking account of all expenses
and income taxes.
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$91$91$2,211$2,211
= .041.041
6-55
ProfitabilityProfitability Ratio ComparisonsRatio ComparisonsProfitabilityProfitability Ratio ComparisonsRatio Comparisons
BW Industry
4.1% 8.2%
4.9 8.1
9.0 7.6
BW Industry
4.1% 8.2%
4.9 8.1
9.0 7.6
Year
2003
2002
2001
Net Profit MarginNet Profit Margin
BW has a poor Net Profit Margin.
6-56
Net Profit Margin --Net Profit Margin --Trend Analysis ComparisonTrend Analysis ComparisonNet Profit Margin --Net Profit Margin --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Net Profit Margin
4
5
6
7
8
9
10
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
6-57
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Return on InvestmentReturn on Investment
Net Profit after TaxesNet Profit after TaxesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Return on InvestmentReturn on Investment
Net Profit after TaxesNet Profit after TaxesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003Indicates the
profitability on the assets of the firm (after all expenses and taxes).
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$91$91$2,160$2,160
= .042.042
6-58
ProfitabilityProfitability Ratio ComparisonsRatio ComparisonsProfitabilityProfitability Ratio ComparisonsRatio Comparisons
BW Industry
4.2% 9.8%
5.0 9.1
9.1 10.8
BW Industry
4.2% 9.8%
5.0 9.1
9.1 10.8
Year
2003
2002
2001
Return on InvestmentReturn on Investment
BW has a poor Return on Investment.
6-59
Return on Investment –Return on Investment –Trend Analysis ComparisonTrend Analysis ComparisonReturn on Investment –Return on Investment –Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Return on Investment
4
6
8
10
12
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
6-60
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Return on EquityReturn on Equity
Net Profit after TaxesNet Profit after TaxesShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003
Return on EquityReturn on Equity
Net Profit after TaxesNet Profit after TaxesShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003Indicates the profitability
to the shareholders of the firm (after all
expenses and taxes).
Income Statement /Balance Sheet
Ratios
Profitability Ratios
$91$91$1,139$1,139
= .08.08
6-61
ProfitabilityProfitability Ratio ComparisonsRatio ComparisonsProfitabilityProfitability Ratio ComparisonsRatio Comparisons
BW Industry
8.0% 17.9%
9.4 17.2
16.6 20.4
BW Industry
8.0% 17.9%
9.4 17.2
16.6 20.4
Year
2003
2002
2001
Return on EquityReturn on Equity
BW has a poor Return on Equity.
6-62
Return on Equity --Return on Equity --Trend Analysis ComparisonTrend Analysis ComparisonReturn on Equity --Return on Equity --Trend Analysis ComparisonTrend Analysis Comparison
Trend Analysis of Return on Equity
7.0
10.5
14.0
17.5
21.0
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
6-63
Summary of the Profitability Summary of the Profitability Trend AnalysesTrend AnalysesSummary of the Profitability Summary of the Profitability Trend AnalysesTrend Analyses
The profitability ratios for BWBW have ALL been falling since 2001. Each has been below the industryindustry averages for the past three years.
This indicates that COGSCOGS and administrative costsadministrative costs may both be too high and a potential problem for BWBW.
Note, this result is consistent with the low interest coverage ratio.
The profitability ratios for BWBW have ALL been falling since 2001. Each has been below the industryindustry averages for the past three years.
This indicates that COGSCOGS and administrative costsadministrative costs may both be too high and a potential problem for BWBW.
Note, this result is consistent with the low interest coverage ratio.
6-64
Summary of Ratio AnalysesSummary of Ratio AnalysesSummary of Ratio AnalysesSummary of Ratio Analyses
Inventories are too high.
May be paying off creditors (accounts payable) too soon.
COGS may be too high.
Selling, general, and administrative costs may be too high.
Inventories are too high.
May be paying off creditors (accounts payable) too soon.
COGS may be too high.
Selling, general, and administrative costs may be too high.
6-65
Common-size AnalysisCommon-size AnalysisCommon-size AnalysisCommon-size Analysis
An analysis of percentage financial statements where all
balance sheet items are divided by total assets and all income statement items are divided by
net sales or revenues.
An analysis of percentage financial statements where all
balance sheet items are divided by total assets and all income statement items are divided by
net sales or revenues.
6-66
Basket Wonders’ Common Basket Wonders’ Common Size Balance SheetsSize Balance SheetsBasket Wonders’ Common Basket Wonders’ Common Size Balance SheetsSize Balance Sheets
Regular (thousands of $) Common-Size (%)
Assets 2001 2002 2003 2001 2002 2003
Cash 148 100 90 12.10 4.89 4.15
AR 283 410 394 23.14 20.06 18.17
Inv 322 616 696 26.33 30.14 32.09
Other CA 10 14 15 0.82 0.68 0.69
Tot CA 763 1,140 1,195 62.39 55.77 55.09
Net FA 349 631 701 28.54 30.87 32.32
LT Inv 0 50 50 0.00 2.45 2.31
Other LT 111 223 223 9.08 10.91 10.28
Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0
6-67
Basket Wonders’ Common Basket Wonders’ Common Size Balance SheetsSize Balance SheetsBasket Wonders’ Common Basket Wonders’ Common Size Balance SheetsSize Balance Sheets
Regular (thousands of $) Common-Size (%)
Liab+Equity 2001 2002 2003 2001 2002 2003
Note Pay 290 295 290 23.71 14.43 13.37
Acct Pay 81 94 94 6.62 4.60 4.33
Accr Tax 13 16 16 1.06 0.78 0.74
Other Accr 15 100 100 1.23 4.89 4.61
Tot CL 399 505 500 32.62 24.71 23.05
LT Debt 150 453 530 12.26 22.16 24.44
Equity 674 1,086 1,139 55.11 53.13 52.51
Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0
6-68
Basket Wonders’ Common Basket Wonders’ Common Size Income StatementsSize Income StatementsBasket Wonders’ Common Basket Wonders’ Common Size Income StatementsSize Income Statements
Regular (thousands of $) Common-Size (%)
2001 2002 2003 2001 2002 2003
Net Sales 1,235 2,106 2,211 100.0 100.0 100.0
COGS 849 1,501 1,599 68.7 71.3 72.3
Gross Profit 386 605 612 31.3 28.7 27.7
Adm. 180 383 402 14.6 18.2 18.2
EBIT 206 222 210 16.7 10.5 9.5
Int Exp 20 51 59 1.6 2.4 2.7
EBT 186 171 151 15.1 8.1 6.8
EAT 112 103 91 9.1 4.9 4.1
Cash Div 50 50 50 4.0 2.4 2.3
6-69
Index AnalysesIndex AnalysesIndex AnalysesIndex Analyses
An analysis of percentage financial statements where all balance sheet or income statement figures for a
base year equal 100.0 (percent) and subsequent financial statement
items are expressed as percentages of their values in the base year.
An analysis of percentage financial statements where all balance sheet or income statement figures for a
base year equal 100.0 (percent) and subsequent financial statement
items are expressed as percentages of their values in the base year.
6-70
Basket Wonders’ Basket Wonders’ Indexed Balance SheetsIndexed Balance SheetsBasket Wonders’ Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets
Regular (thousands of $) Indexed (%)
Assets 2001 2002 2003 2001 2002 2003
Cash 148 100 90 100.0 67.6 60.8
AR 283 410 394 100.0 144.9 139.2
Inv 322 616 696 100.0 191.3 216.1
Other CA 10 14 15 100.0 140.0 150.0
Tot CA 763 1,140 1,195 100.0 149.4 156.6
Net FA 349 631 701 100.0 180.8 200.9
LT Inv 0 50 50 100.0 inf. inf.
Other LT 111 223 223 100.0 200.9 200.9
Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4
6-71
Basket Wonders’ Basket Wonders’ Indexed Balance SheetsIndexed Balance SheetsBasket Wonders’ Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets
Regular (thousands of $) Indexed (%)
Liab+Equity 2001 2002 2003 2001 2002 2003
Note Pay 290 295 290 100.0 101.7 100.0
Acct Pay 81 94 94 100.0 116.0 116.0
Accr Tax 13 16 16 100.0 123.1 123.1
Other Accr 15 100 100 100.0 666.7 666.7
Tot CL 399 505 500 100.0 126.6 125.3
LT Debt 150 453 530 100.0 302.0 353.3
Equity 674 1,086 1,139 100.0 161.1 169.0
Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
6-72
Basket Wonders’ Indexed Basket Wonders’ Indexed Income StatementsIncome StatementsBasket Wonders’ Indexed Basket Wonders’ Indexed Income StatementsIncome Statements
Regular (thousands of $) Indexed (%)
2001 2002 2003 2001 2002 2003
Net Sales 1,235 2,106 2,211 100.0 170.5 179.0
COGS 849 1,501 1,599 100.0 176.8 188.3
Gross Profit 386 605 612 100.0 156.7 158.5
Adm. 180 383 402 100.0 212.8 223.3
EBIT 206 222 210 100.0 107.8 101.9
Int Exp 20 51 59 100.0 255.0 295.0
EBT 186 171 151 100.0 91.9 81.2
EAT 112 103 91 100.0 92.0 81.3
Cash Div 50 50 50 100.0 100.0 100.0
6-73
Operating cycleOperating cycle
The length of time from the commitment of cash for purchases until the collection of receivables resulting from the sale of goods or receivable.
ITD+RTD
6-74
CASH CYCLECASH CYCLE
(ITD+RTD)-PTD
The length of time from the actual outlay of cash for purchases until the collection of receivables resulting from the sale of goods or services.