Chapter 3 Working with Financial Statements 4/17/2018 Chapter 3 Working with Financial Statements Common Size Statements Ratios Issues with Ratios 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Clicker Test Question Describe your feeling/opinion? A. financial wealth is very important to happiness B. financial wealth is only one factor to happiness C. wealth has nothing to do with happiness D. wealth usually detracts from happiness E. really couldn’t say 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question Company ABC Earnings: ABC Co. 2008 2009 Net Income $1.0 million $1.2 million What is your conclusion? 2009 clearly better than 2008 2008 clearly better than 2009 Depends 4/17/2018 Chapter 3: Working with Financial Statements

Common Size Statements 4/17/2018 Common Size Statements Income Statement State all items as percent of sales Balance Sheet State all items as a percent of total assets Ball Corporation 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Categories of Ratios Short Term Solvency/Liquidity Long Term Solvency/Leverage/Debt/Coverage Asset Management/Turnover Profitability 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Categories of Ratios (con’t) Market based Dupont Framework Growth Ratios Note: See text table 3.5 page 63 for ratio summary 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Short Term Solvency Ratios Current ratio Quick ratio 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Long Term Solvency (Leverage, Debt, Coverage Ratios) Total Debt Ratio Debt Equity Ratio Equity Multiplier Times Interest Earned (TIE) Cash Coverage 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Long Term Solvency Total Debt Ratio Debt Equity Ratio 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Long Term Solvency Equity Multiplier 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question If a company’s debt ratio (total debt/assets) = .6, what is the company’s debt-equity ratio (debt/equity)?   A. .5 B. .6 C. 1.0 D. 1.5 E. 2.5 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question If a company’s debt-equity ratio (debt/equity) is 1.5, what is the equity multiplier (total assets/equity)? A. .5 B. .6 C. 1.0 D. 1.5 E. 2.5 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Long Term Solvency Times Interest Earned (TIE) Cash Coverage 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Asset Management Ratios (Turnover) Inventory Turnover Days Sales in Inventory Receivables Turnover Days Sales in Receivables (aka DSO) Total Asset Turnover 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Asset Management Ratios (Turnover) Inventory Turnover Days Sales in Inventory 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Asset Management Ratios (Turnover) Receivables Turnover Days Sales in Receivables (aka DSO) 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question Calculate DSO: A/R = $57,000; A/R Turnover = 12; Total assets = $356,000; A/P = $78,000 A. $800 B. 12 times C. 30 days D. 60 days E. 12 days 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Asset Management Ratios (Turnover) Total Asset Turnover 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Profitability Ratios Profit Margin Return on Assets (ROA) 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Profitability Ratios Return on Equity (ROE) 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Market Ratios Price-Earnings Multiple 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Market Ratios Market to Book Ratio 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Dupont Identity ROE = Profit Margin x Total Asset Turnover x Equity Multiplier 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Dupont Identity ROE = Profit Margin x Total Asset Turnover x Equity Multiplier 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question Given the DuPont framework, the more debt a company has and if ROA is negative, then …. A. the more positive ROE is B. the more negative ROE is C. ROE will remain the same D. ROE depends on equity, not debt E. ROE has no relation to ROA at all 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question What’s return on assets (ROA) if profit margin is 10% and total asset turnover is 2? A. 2% B. 5% C. 10% D. 15% E. 20% 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Growth Ratios Dividend Ratios Dividend payout ratio Retention ratio 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Growth Ratios Internal Growth Rate 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios Growth Ratios Sustainable Growth Rate 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Ratios What affects growth? Item Change Growth Profits Retained External Funds (debt or equity) Assets Used (especially LT assets) Dividends Paid 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question Which ratio below is an “Asset Management” ratio? (also know as asset efficiency or turnover ratios) A. current assets / current liabilities B. net income / sales C. sales / fixed assets D. total debt / total assets E. EBIT / interest 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question Analysts following Gentech Corporation report the company’s dividend yield (dividends paid per share divided by stock price) has doubled from 5% to 10%. Is this: A. Clearly good news B. Clearly bad news C. It really depends 4/17/2018 Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements 4/17/2018 Issues with Ratios Uses Analysis Problems Comparative Analysis of Ball Corp 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements

Chapter 3: Working with Financial Statements Clicker Question Based on the ratios seen, how would you rank Ball Corp? A. Buy B. Hold C. Sell 4/17/2018 Chapter 3: Working with Financial Statements

Chapter-end Homework Problems 4/17/2018 Chapter-end Homework Problems Chapter 3 Problems 1, 3, 5, 7, 9, 13, 17, 19 4/17/2018 Chapter 3: Working with Financial Statements Chapter 3: Working with Financial Statements