Fundamentals of Finance Bob Donchez CUBIC 2012 Section 2 Fundamentals of Finance Bob Donchez

Question (2.0) After completing the CUBIC accounting module, describe your opinion regarding knowledge of financial statements: A. I am very comfortable with them B. I have a general understanding but lack details C. I saw much, but retained little

Question (2.1) “A statement of assets, liabilities, and net worth at a point in time” best describes what? A. The income statement B. The balance sheet C. The statement of cash flows D. The reconciled balance position

2-0 Financial Statements and Analysis Topics 2-1 Balance Sheet 2-2 Income Statement 2-3 Cash Flows 2-4 Financial Analysis—Ratios 2-5 Case #1: Financial Analysis: Chipotle Mexican Grill, Inc.

Financial Statements and Analysis 2-1 Balance Sheet What is owned, what is owed, and the difference (equity) at a specific point in time Assets Current Assets Long Term (Fixed) Assets Liabilities Current Liabilities Long Term Liabilities Equity/Net Worth

Balance Sheet Identity: Total Assets = Total Liabilities + Shareholder Equity

Financial Statements and Analysis 2-1 Balance Sheet Chipotle Mexican Grill, Inc. Balance Sheet as of December 31, 2010 ($000) Assets Liabilities & Stockholders’ Equity Cash $ 224 Accts Payable & Accruals $ 123 Accounts Receivable 6 Notes Payable 0 Inventory & Other CA 176 Current Liabilities 123 Current Assets 406 Long-term liabilities 188 Common Stock 595 Retained Earnings 457 Fixed Assets 716 Treasury Stock - 241 Total Equity 811 Total Assets $ 1,122 Total Liabilities & SH Equity $1,122

Financial Statements and Analysis 2-2 Income Statement Money made, expenses incurred, and the difference (profit) over a specified period of time Accrual versus Cash Accounting Revenue Expenses Variable, direct, COGS Fixed, overhead, SGA Depreciation Earning before interest and tax (EBIT) Interest Taxes Net Income

Financial Statements and Analysis 2-2 Income Statement Chipotle Mexican Grill, Inc. Income Statement January 1, 2010 to December 31, 2010 Sales $ 1,836 -Cost of sales 1,347 -General and admin expenses 132 -Depreciation 69 -Total operating expenses 1,548 =Earnings before interest and taxes (EBIT) $288 -Interest paid (earned) -1 =Taxable income (earnings before tax—EBT) $289 -Taxes 110 =Net income $179 Dividends $0 Addition to retained earnings $179

Financial Statements and Analysis 2-3 Cash Flows Operating Cash Flow OCF = EBIT + Depreciation – Tax

Financial Statements and Analysis 2-3 Cash Flows Other Cash Flow Measures: Capital Spending CAPX = Fixed Assets(1) – Fixed Assets(0) + Depreciation Change in Net Working Capital CNWC = NWC(1) – NWC(0) (NWC = current assets – current liabilities) Putting it Together: Free Cash Flow (CF from Assets) OCF - CAPX - CNWC

Financial Statements and Analysis 2-3 Cash Flows On-line resource on financial statements: http://www.baruch.cuny.edu/tutorials/statements

Question (2.4.1) Company ABC made $1.0 million profit in 2010 and $1.2 million in 2011. The 2011 result is: A. Clearly good relative to 2010 B. Clearly bad relative to 2010 C. Really depends….

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Ratio Analysis Introduction to Ratios Categories of Ratios Common sized statements Short term Solvency/Liquidity Long term Solvency/Leverage Debt Coverage Profitability Market

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Putting it all together: Trend and Comparison Analysis The DuPont Framework

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Common Size Statements Income Statement State all items as percent of sales Balance Sheet State all items as a percent of total assets

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Common Size Statements—Balance Sheet: Chipotle 2010 Current Assets 2010 % Cash & ST Invest 350 31.2% Accounts rec. 6 0.5% Inventory 7 0.6% Other CA 44 3.9% Total current assets 407 36.3% Fixed assets Net PP&E 677 60.3% Goodwill 22 2.0% Other assets 16 1.4% Total fixed assets 715 63.7% Total Assets 1,122 100.0% Current Liabilities 2010 % Accounts Payable 123 11.0% Notes Payable 0.0% Total current liabilities Long-term liabilities Long term debt Other LT liabilities 188 16.8% Total LT liabilities Total Liabilities 311 27.7% Shareholder Equity Common stock 595 53.0% Retained earnings 457 40.7% Treasury stock -241 -21.5% Total Equity 811 72.3% Total L&E 1,122 100.0%

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Common Size Statements—Income Statement 2010 Chipotle Mexican Grill 2010 % Sales $ 1,836 Operating costs 1,346 73.3% General and admin 133 7.2% Depreciation 69 3.8% EBIT 288 15.7% Interest (1) -0.1% Taxable income 289 Taxes (40%) 110 6.0% Net income 179 9.7%

Question (2.4.2) A. 14.0% B. 16.7% C. 20.0% D. 24.0% E. 36.0% Company ABC has total assets of $10 million, revenue of $12 million, and current assets of $2 million. What is the common size percentage of current assets? A. 14.0% B. 16.7% C. 20.0% D. 24.0% E. 36.0%

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Short Term Solvency Ratios: firm’s ability to meet short term obligations with short term assets. Current Ratio Quick Ratio

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Long Term Solvency/Debt Ratios: how much debt the firm has relative to size. Total Debt Ratio Debt to Equity Ratio Equity Multiplier (Leverage Factor)

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Long Term Solvency/Coverage Ratios: how well the firm’s profit “covers” its debt obligations. Times Interest Earned

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Asset Management/Efficiency Ratios: how well the firm’s assets generate sales. Total Asset Turnover Inventory Turnover Accounts Receivable Turnover

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Profitability: how much profit the firm has relative to size. Profit Margin Return on Assets Return on Equity

Question (2.4.3) Calculate equity multiplier, given the following information: Total debt = $35,000 Net income = $10,000 Equity = $15,000 Revenue = $55,000 A. .18 B. .27 C. 2.33 D. 3.33 E. Can’t be calculated with info provided

E. Can’t be calculated with info provided Question (2.4.4) Calculate return on assets, given the following information: Total debt = $35,000 Net income = $10,000 Equity = $15,000 Revenue = $55,000 A. 18% B. 20% C. 25% D. 67% E. Can’t be calculated with info provided

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Market Value Measures: ratios utilizing market prices. Price Earnings (PE) Ratio Example: Dell Computer Earnings per share = $ 1.88 Price per share = $ 16.85 PE Ratio = 16.85 / 1.88 = 8.96x

Compute the 2011 PE multiple for Chipotle. Question (2.4.5) Compute the 2011 PE multiple for Chipotle. Net income = $215 M Shares outstanding = 31.2 M shares End of 2011 stock price = $338 A. 4.8 B. 6.9 C. 11.9 D. 49.1 E. Can’t be calculated with info provided

What ratio category do you think lenders would be most interested in? Question (2.4.6) What ratio category do you think lenders would be most interested in? A. Short term liquidity B. Long term solvency (debt and coverage) C. Asset management/efficiency D. Profit E. Market

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Ratio Analysis The DuPont Framework

Financial Statements and Analysis 2-4 Financial Analysis--Ratios Ratio Analysis The DuPont Framework

Financial Statements and Analysis 2-4 Financial Analysis—Ratios Ratio Analysis Issues/Drawback in Ratio Analysis Book values (past) versus market values (present) How close are comparisons Only as good as reported Must look “behind” the numbers On-line resources for financial statements and ratios : http://finance.yahoo.com http://moneycentral.msn.com

Tasks for Case Preparation Case Review case information Financial Statements and Analysis 2-5 Financial Analysis Case: Chopotle Mexican Grill, Inc Tasks for Case Preparation Case Review case information case spreadsheet case questions Teams prepare and discuss case numbers Teams address case questions Class discussion Link to Case Information Link to Case Spreadsheet