Analysis of Financial Statements.ppt

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1、,Ratio analysisDu Pont systemEffects of improving ratiosLimitations of ratio analysisQualitative factors,CHAPTER 10 Analysis of Financial Statements,Income Statement,2002 2003ESales5,834,400 7,035,600COGS4,980,000 5,800,000Other expenses720,000 612,960Deprec.116,960 120,000 Tot. op. costs5,816,960 6

2、,532,960 EBIT17,440 502,640Int. expense176,000 80,000 EBT(158,560)422,640Taxes (40%)(63,424)169,056Net income(95,136)253,584,Balance Sheets: Assets,2002 2003ECash7,282 14,000S-T invest.20,000 71,632AR632,160 878,000Inventories1,287,360 1,716,480 Total CA1,946,802 2,680,112 Net FA939,790 836,840Total

3、 assets2,886,592 3,516,952,Balance Sheets: Liabilities & Equity,2002 2003EAccts. payable324,000 359,800Notes payable720,000 300,000Accruals284,960 380,000 Total CL1,328,960 1,039,800Long-term debt1,000,000 500,000Common stock460,000 1,680,936Ret. earnings97,632 296,216 Total equity557,632 1,977,152T

4、otal L&E2,886,592 3,516,952,Other Data,20022003EStock price$6.00$12.17# of shares100,000 250,000EPS-$0.95$1.01DPS$0.11$0.22Book val. per share$5.58$7.91Lease payments40,00040,000Tax rate0.40.4,Standardize numbers; facilitate comparisonsUsed to highlight weaknesses and strengths,Why are ratios useful

5、?,Liquidity: Can we make required payments as they fall due?Asset management: Do we have the right amount of assets for the level of sales?,What are the five major categories of ratios, and what questions do they answer?,(More),Debt management: Do we have the right mix of debt and equity?Profitabili

6、ty: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?Market value: Do investors like what they see as reflected in P/E and M/B ratios?,Calculate the firms forecasted current and quick ratios for 2003.,CR03 = = = 2.58x.,QR03 =,= = 0.93x.,CACL,$2,680$1,040,

7、$2,680 - $1,716$1,040,CA - Inv.CL,Expected to improve but still below the industry average.Liquidity position is weak.,Comments on CR and QR,2003E20022001Ind.CR2.58x1.46x2.3x2.7xQR0.93x0.5x0.8x1.0x,What is the inventory turnover ratio as compared to the industry average?,Inventory turnover is below

8、industry average.Firm might have old inventory, or its control might be poor.No improvement is currently forecasted.,Comments on Inventory Turnover,ReceivablesAverage sales per day,DSO is the average number of days after making a sale before receiving cash.,DSO= = = 45.5 days.,ReceivablesSales/365,$

9、878$7,036/365,Appraisal of DSO,Firm collects too slowly, and situation is getting worse.Poor credit policy.,200320022001Ind.DSO45.539.537.432.0,Fixed Assets and Total AssetsTurnover Ratios,(More),FA turnover is expected to exceed industry average. Good.TA turnover not up to industry average. Caused

10、by excessive current assets (A/R and inventory).,2003E 2002 2001 Ind.FA TO8.4x6.2x10.0x7.0xTA TO2.0x2.0x2.3x2.5x,Calculate the debt, TIE, and EBITDA coverage ratios.,(More),All three ratios reflect use of debt, but focus on different aspects.,EBITDAcoverage,= EC,= = 5.5x.,EBIT + Depr. & Amort. + Lea

11、se payments Interest Lease expense pmt.,+ + Loan pmt.,$502.6 + $120 + $40 $80 + $40 + $0,Recapitalization improved situation, but lease payments drag down EC.,How do the debt management ratios compare with industry averages?,2003E 20012 2001 Ind.D/A43.8%80.7%54.8%50.0%TIE6.3x0.1x3.3x6.2xEC5.5x0.8x2.

12、6x8.0x,Very bad in 2002, but projected to meet industry average in 2003. Looking good.,Profit Margin (PM),2003E20022001Ind.PM3.6%-1.6%2.6%3.6%,BEP= = 14.3%.,Basic Earning Power (BEP),EBIT Total assets,$502.6 $3,517,(More),BEP removes effect of taxes and financial leverage. Useful for comparison.Proj

13、ected to be below average.Room for improvement.,2003E20022001Ind.BEP14.3%0.6%14.2%17.8%,Return on Assets (ROA)and Return on Equity (ROE),ROA= = 7.2%.,Net income Total assets,$253.6 $3,517,(More),2003E 2002 2001 Ind.ROA7.2%-3.3%6.0%9.0%ROE12.8%-17.1%13.3%18.0%,Both below average but improving.,ROA is

14、 lowered by debt-interest expense lowers net income, which also lowers ROA.However, the use of debt lowers equity, and if equity is lowered more than net income, ROE would increase.,Effects of Debt on ROA and ROE,Calculate and appraise theP/E, P/CF, and M/B ratios.,Industry P/E Ratios,IndustryTicker

15、*P/EBankingSTI17.6SoftwareMSFT33.0DrugPFE31.7Electric UtilitiesDUK13.7SemiconductorsINTC57.5SteelNUE28.1TobaccoMO12.3Water UtilitiesCFT21.8S&P 500 30.4*Ticker is for typical firm in industry, but P/E ratio is for the industry, not the individual firm.,NI + Depr. Shares out.,CF per share= = $1.49.,$2

16、53.6 + $120.0250,Price per share Cash flow per share,P/CF = = = 8.2x.,$12.17$1.49,Com. equity Shares out.,BVPS= = $7.91.,$1,977250,Mkt. price per share Book value per share,M/B= = 1.54x.,$12.17$7.91,P/E: How much investors will pay for $1 of earnings. High is good.M/B: How much paid for $1 of book v

17、alue. Higher is good.P/E and M/B are high if ROE is high, risk is low.,2003E 2002 2001 Ind.P/E12.0x-6.3x9.7x14.2xP/CF8.2x27.5x8.0x7.6xM/B1.5x1.1x1.3x2.9x,Common Size Balance Sheets:Divide all items by Total Assets,Assets200120022003EInd.Cash0.6%0.3%0.4%0.3%ST Invest.3.3%0.7%2.0%0.3%AR23.9%21.9%25.0%

18、22.4%Invent.48.7%44.6%48.8%41.2%Total CA76.5%67.4%76.2%64.1%Net FA23.5%32.6%23.8%35.9%TA100.0%100.0%100.0%100.0%,Divide all items by Total Liabilities & Equity,200120022003EInd.AP9.9%11.2%10.2%11.9%Notes pay.13.6%24.9%8.5%2.4%Accruals9.3%9.9%10.8%9.5%Total CL32.8%46.0%29.6%23.7%LT Debt22.0%34.6%14.2

19、%26.3%Total eq.45.2%19.3%56.2%50.0%Total L&E100.0%100.0%100.0%100.0%,Analysis of Common Size Balance Sheets,Computron has higher proportion of inventory and current assets than Industry.Computron now has more equity (which means LESS debt) than Industry.Computron has more short-term debt than indust

20、ry, but less long-term debt than industry.,Common Size Income Statement:Divide all items by Sales,200120022003EInd.Sales100.0%100.0%100.0%100.0%COGS83.4%85.4%82.4%84.5%Other exp.9.9%12.3%8.7%4.4%Depr.0.6%2.0%1.7%4.0% EBIT6.1%0.3%7.1%7.1%Int. Exp.1.8%3.0%1.1%1.1% EBT4.3%-2.7%6.0%5.9%Taxes1.7%-1.1%2.4

21、%2.4%NI2.6%-1.6%3.6%3.6%,Analysis of Common Size Income Statements,Computron has lower COGS (86.7) than industry (84.5), but higher other expenses. Result is that Computron has similar EBIT (7.1) as industry.,Percentage Change Analysis: Find Percentage Change from First Year (2001),Income St.2001200

22、22003ESales0.0%70.0%105.0%COGS0.0%73.9%102.5%Other exp.0.0%111.8%80.3%Depr.0.0%518.8%534.9% EBIT0.0%-91.7%140.4%Int. Exp.0.0%181.6%28.0% EBT0.0%-208.2%188.3%Taxes0.0%-208.2%188.3%NI0.0%-208.2%188.3%,Analysis of Percent Change Income Statement,We see that 2003 sales grew 105% from 2001, and that NI g

23、rew 188% from 2001.So Computron has become more profitable.,Percentage Change Balance Sheets,Assets200120022003ECash0.0%-19.1%55.6%ST Invest.0.0%-58.8%47.4%AR0.0%80.0%150.0%Invent.0.0%80.0%140.0%Total CA0.0%73.2%138.4%Net FA0.0%172.6%142.7%TA0.0%96.5%139.4%,Liab. & Eq.200120022003EAP0.0%122.5%147.1%

24、Notes pay.0.0%260.0%50.0%Accruals0.0%109.5%179.4%Total CL0.0%175.9%115.9%LT Debt0.0%209.2%54.6%Total eq.0.0%-16.0%197.9%Total L&E0.0%96.5%139.4%,Analysis of Percent Change Balance Sheets,We see that total assets grew at a rate of 139%, while sales grew at a rate of only 105%. So asset utilization re

25、mains a problem.,Explain the Du Pont System,The Du Pont system focuses on:Expense control (PM)Asset utilization (TATO)Debt utilization (EM)It shows how these factors combine to determine the ROE.,( )( )( ) = ROE,Profitmargin,TAturnover,Equitymultiplier,NI Sales,SalesTA,TA CE,20012.6% x 2.3x2.2=13.2%

26、2002-1.6%x2.0x5.2=-16.6%20033.6%x2.0x1.8=13.0%Ind.3.6%x2.5x2.0=18.0%,The Du Pont System,x,x,= ROE.,What are some potential problems and limitations of financial ratio analysis?,Comparison with industry averages is difficult if the firm operates many different divisions.“Average” performance is not n

27、ecessarily good.Seasonal factors can distort ratios.,(More),Window dressing techniques can make statements and ratios look better.Different accounting and operating practices can distort comparisons.Sometimes it is difficult to tell if a ratio value is “good” or “bad.”Often, different ratios give di

28、fferent signals, so it is difficult to tell, on balance, whether a company is in a strong or weak financial condition.,What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?,Are the companys revenues tied to a single customer?To wha

29、t extent are the companys revenues tied to a single product?To what extent does the company rely on a single supplier?,(More),What percentage of the companys business is generated overseas?What is the competitive situation?What does the future have in store?What is the companys legal and regulatory environment?,