1 The Annual Report  Narrative description of the company’s activities during the year. A company’s annual report contains:  The income statement  The balance sheet  The statement of cash flows  Notes to the financial statements  The Auditor’s report.  The company’s accounting statements.

2 The Balance Sheet  Reports the financial position of a company at a particular point in time.  Shows assets on the left-hand side.  Shows the liabilities and the stockholders’ equity on the right-hand side.

3 Crime Control Current Assets Cash & Equivalents €26 €18 Accounts Receivable €394 €210 Inventories €140 €120 Total Current Assets €560 €348 Fixed Assets Gross Fixed Assets €1,129 €816 Depreciation (€379) (€288) Net Fixed Assets €750 €528 TOTAL ASSETS €1,310 €876

Current Liabilities Accounts Payable €34 €20 Notes Payable €114 €56 Accrued Expenses €105 €100 Total Current Liabilities €253 €176 Long Term Liabilities Long Term Bonds €262 €112 Other, Incl. Def. Tax €44 €32 Total Long Term Liabilities €306 €144 Shareholders Equity Preferred Stock €20 €20 Common Stock €401 €272 Retained Earnings €330 €296 Treasury Stock €0 (€32) Total Common Equity €731 €536 Total Shareholders Equity €751 €556 TOTAL LIABILITIES & SHAREHOLDER’S EQUITY €1,310 €876 Crime Control

5 The Income Statement  Reports revenues, expenses, and profit (or loss) during the year.  Uses an “accrual” basis.  Also reports earnings and dividends on a per share basis.

6 Income Statement Sales €1,106 €840 Cost of Goods €560 €428 Gross Profit €546 €412 Selling & Admin. Expenses €342 €313 Lease Payments €6 €5 Depreciation €97 €40 Operating Profit €107 €59 Non Operating Income (€4) €6 Earnings Before Interest & Tax €103 €65 Interest Expense €15 €13 Taxable Income €88 €52 Total Tax €28 €21 Net Income €60 €31 Preferred Dividends €6 €6 Net Income Available to Common €54 €25 Common Dividends €20 €15 Addition to Retained Earnings €34 €10 Crime Control

7 Per Share Data Per Share Data: Shares Outstanding (millions) Earnings per Share Dividends per Share Market Price at year-end €3.38 €1.25 € €1.68 €1.00 €26.00

8  Standardize numbers; facilitate comparisons  Used to highlight weaknesses and strengths Why are ratios useful?

9  Liquidity: Five Major Categories of Ratios Can we make required payments?  Asset management: Right amount of assets vs. sales? Right mix of debt and equity?  Debt management: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?  Profitability : Do investors like what they see as reflected in P/E and M/B ratios?  Market value:

10 Market Value Ratios  P/E Ratio  PEG Ratio  Market-to-Book Ratio  Dividend Yield  Economic Value Added (EVA)

11 P/E Ratio Pr /P  ShareperEarnings Shareperice RatioE  € 00.26€ P/E 2013 = 8.58  38.3€ 00.29€ P/E 2014 =

12 PEG Ratio P/E Ratio PEG  Growth in Earnings / 40% =PEG 2013  8.58 / 101% =PEG 2014 

13 Market-to-Book Ratio 73.0 Pr Share per ValueBook Shareperice  RatioBooktoMarket  73.35€ 00.26€ 15/536€ 00.26€  Market to Book Ratio 2013 = 63.0  69.45€ 00.29€ 16/731€ 00.29€  Market to Book Ratio 2014 =

14 Dividend Yield DividendYield Dividends per Share iceperShare = Pr.385% == €. € Dividend Yield 2013 == €. € Dividend Yield %

15 Summary of Market Value Ratios Ratio Ind. Average (2014) P/E Dividend Yield Market - to - Book % % PEG

16 Factors that Affect Stock Performance Performance (Stock Price) (P/E) (M/B) (Dividend Yield) Risk Return ( ROE = Net Income Total Equity )

17 Return on Equity  EquityTotal Net Income % € 31€  Return on Equity 2014 = %99.7  751€ 60€ Return on Equity 2013

18 The Du Pont system focuses on:  Expense control (P.M.)  Asset utilization (TATO)  Debt utilization (Eq. Mult.) Decomposition of the Return on Equity

19 Decomposition of the Return on Equity Du Pont analysis: 2.Return on assets (ROA) can be decomposed as follows: 1.Return on equity (ROE) can be decomposed as follows: ROE = Net income/Total equity = Net income/Total assets x Total assets/Total equity = ROA x Equity multiplier ROA = Net income/Sales x Sales/Total assets = Profit Margin (PM) x Asset Utilization (AU)

20 Du Pont analysis: 3.Putting it all together gives the Du Pont identity: ROE = ROA x Equity multiplier = Profit margin x Total asset turnover x Equity multiplier = NI / Sales x Sales / TA x TA / Equity Decomposition of the Return on Equity

21 Decomposition Model ROE (NI/Eq) E.M. () Total Assets Total Equity Net Income Sales Profit Margin () ROA ( Net Income Total Assets ) Sales Total Assets TATO ()

22 Equity Multiplier '  EquitysrShareholde AssetsTotal Equity Multiplier € €   876 Equity Multiplier € €   1,310 Equity Multiplier 2013

23  ROA is lowered by debt--interest lowers NI, which also lowers ROA = NI/Assets.  But use of debt lowers equity, hence could raise ROE = NI/Equity. Effects of Debt on ROA and ROE

24 Return on Assets 31€ %53.3 €876  Return on Assets = AssetsTotal IncomeNet Return on Assets 2014 %4.58 1,310€ 60€  Return on Assets 2013

25 Basic Earning Power 65€ % 7.42 €876  BEP = AssetsTotal EBIT BEP 2014 %7.86 1,310€ 103€  BEP 2013

26 Net Profit Margin %69.3 €840 31€ = = Net Profit Margin = Sales IncomeNet Net Profit Margin 2014 = €1,106 €60 =5.42% Net Profit Margin 2013

27 Total Asset Turnover Ratio  AssetsTotal Sales 96.0 € €  TATO €1,310 €1,106  TATO 2013

28 Summary of Profitability Ratios Ratio Ind. Average (2014) Return on Equity Equity Multiplier Return on Assets Net Profit Margin Total Asset T.O. 7.99% % 5.42% % % 3.69% % % 3.68% 0.93 Basic Earning Power7.86%7.42%6.78%

29 Leverage Ratios E.M. Debt Ratio Times Interest Earned (TIE) EBITDA Ratio

30 Debt Ratio RatioDebt = AssetsTotal DebtTotal 37.0 € € = = Ratio 2014 Debt ,310€ 559€ = = DebtRatio 2013

31 Times Interest Earned Ratio € 65 €    ExpenseInterest EBIT T I E € 103 €   T I E 2014 T I E 2013

32 EBITDA Coverage Ratio €13€ 5€ 65€    .    PmtsLeaseExpenseInterest Lease Pmt EBIT EBITDA €15€ €6103€     EBITDA 2014 EBITDA 2013 Depr & Amort   € 35 €91 

33 Summary of Coverage Ratios Ratio Ind. Average (2014) TIE EBITDA Debt Ratio Equity Multiplier

34 Profit Margin – Decomposition Model Profit Margin () Net Income Sales COGS / Sales Selling & Admin. / Sales Other Expense / Sales

Other Expense / Sales Selling & Admin. / Sales COGS / Sales Profit Margin – Decomposition Model

36 () TATO Sales Total Assets FATO Inventory Turnover Days Sales Outstanding Liquidity Current ratio Quick ratio TATO – Decomposition Model

37 Fixed Asset Turnover Ratio € €840 == € 1,106€ == FATO 2014 Fixed Asset Turnover Ratio = AssetsFixedNet Sales FATO 2013

38 Inventory Turnover Ratio == € € Inventory Turnover Ratio = Cost of Goods Sold Inventory Inventory Turnover Ratio 2014 = = € € Inventory Turnover Ratio 2013

39 Receivables Turnover Ratio  ReceivableAccounts Sales CreditAnnual Receivables Turnover Ratio 2.81 €394 €1,106  € 840€  Receivables Turnover Ratio 2014 Receivables Turnover Ratio 2013

40 Days Sales Outstanding (DSO) days == Days Sales Outstanding 365 = TurnoverReceivables DSO 2014 days == DSO 2013

41 Current Ratio € 348€ == = LiabilitiesCurrent AssetsCurrent Current Ratio Current Ratio € 560€ == Current Ratio 2013

42 Quick Ratio € 120€348€ =  =  = LiabilitiesCurrent InventoriesAssetsCurrent Quick Ratio Quick Ratio € 140€560€ =  = Quick Ratio 2013

43 Summary of Asset Activity Ratios Ratio Ind. Average (2014) Days Sales Outst. Inventory T.O. Total Asset T.O. Current Quick Fixed Asset T.O

44 The Statement of Cash Flows  Reports how the company’s cash position changed during the year.  Itemizes the company’s cash flows.  Increase (decrease) in an asset consumes (provides) cash.  Decrease (increase) in a liability consumes (provides) cash.

45 The Statement of Cash Flows 2014 Cash Flow from Operating Activities(€34) Cash Flow from Investing Activities(€313) Cash Flow from Financing Activities€355 Net Increase (Decrease) in Cash & Equivalents €8 Cash & Equivalents at beginning of year€18 Cash & Equivalents at end of year €26

46 Potential Problems and Limitations  Comparison with industry averages is difficult if the firm operates many different divisions.  Seasonal factors can distort ratios.  “Window dressing” techniques can make statements and ratios look better.  Different operating and accounting practices distort comparisons.

47 International Accounting Listing Extraordinary Items on Financial Statements: -IFRS: Prohibited Method for Determining Inventory Cost: -IFRS: LIFO is prohibited Classification of Interest Received and Paid in the Cash Flow Statement: -IFRS: May be classified as an operating, investing, or financing activity Inclusion of Bank Overdrafts in Cash: -IFRS: Included if they form an integral part of an entity's cash management

48 International Accounting Minimum Liability Recognition for Benefits Under Defined Benefit Plans: -IFRS: No minimum liability requirement Recognition of Past Service Costs Related to Benefits That Have Vested: -IFRS: Recognized Immediately Types of Borrowing Costs Eligible for Capitalization: -IFRS: Includes interest, certain ancillary costs, and exchange differences that are regarded as an adjustment of interest. Different Accounting Policies of Investor and Associate: -IFRS: Must conform policies

49 International Accounting Research and Development Costs -IFRS: Capitalized, if certain criteria are met. -US GAAP: Expense, except for website development costs and certain costs for developing software. Investments in Unlisted Equity Instruments: -IFRS: Measured at fair value if reliably measurable; otherwise at cost -US GAAP: Measured at cost Hedging Foreign Currency Risk In a Held-to-Maturity Investment: -IFRS: Can qualify for hedge accounting -US GAAP: Cannot qualify for hedge accounting Presentation of Discontinued Operations: -IFRS: Post-tax income is required on the face of the income statement -US GAAP: Both pre-tax and post-tax income or loss is required on the face of the income statement