Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., Part One: Financial Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Return on Assets (ROA) Slide 13-1 Return on assets = Net income + Interest (1 - Tax rate) Total assets Return on assets = $ $33.3(.66) $4,237.1 Return on assets =16.6 percent Return on assets (ROA) reflects how much the firm has earned on the investment of all the financial resources committed to the firm.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Return on Invested Capital Slide 13-2 Return on invested capital focuses more on the use of permanent capital (noncurrent liabilities plus shareholders’ equity) Return on invested capital = $ $33.3(.66) $1, $1,713.4 Return on invested capital =23.2 percent Return on invested capital = Net income + Interest (1 - Tax rate) Long-term liabilities + Shareholders’ equity

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Return on Shareholders’ Equity Slide 13-3 Return on shareholders’ equity (ROE) reflects how much the firm has earned on the funds invested by the shareholders. Return on shareholders’ equity = Net income Shareholders’ equity Return on shareholders’ equity = $680.7 $1,713.4 Return on shareholders’ equity = 39.7 percent

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Return on Investment Slide 13-4 Net incomeSales Investment * profit margin or return on sales turnover

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Price/Earnings Ratio (P/E) Slide 13-5 Price/earnings ratio = Market price per share Net income per share Price/earnings ratio = $ $2.94 Price/earnings ratio = 22 times The price/earnings ratio (P/E) is the best indicator of how investors judge the firm’s future performance.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Gross Margin Percentage Slide 13-6 Gross margin percentage = Gross margin Net sales revenues Gross margin percentage = $3,306.4 $6,295.4 Gross margin percentage =52.5 percent

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Profit Margin Slide 13-7 Profit margin = Net income Net sales revenues Profit margin = $680.7 $6,295.4 Profit margin =10.8 percent

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Earnings Per Share Slide 13-8 Earnings per share = Net income Number of shares of common stock outstanding Earnings per share = $ Earnings per share =$2.94

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Asset Turnover Slide 13-9 Asset turnover = Sales revenue Total assets Asset turnover =1.5 times $6,295.4 $4,237.1 Asset turnover =

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Investment Capital Turnover Slide Invested capital turnover = Sales revenue Invested capital 1.5 times Invested capital turnover = $6,295.4 $4,237.1 Invested capital turnover =

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Equity turnover = Sales revenue Shareholders’ equity Equity turnover =3.7 times EquityTurnover Slide $6,295.4 $1,713.4 Equity turnover =

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Capital Intensity Slide Capital intensity = Sales revenue Property, plant, and equipment Capital intensity = $6,295.4 $2,768.4 Capital intensity = 2.3 times The capital intensity ratio focuses only on the usage of property, plant, and equipment. Companies with a high ratio are particularly vulnerable to cyclical fluctuations.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Working Capital Turnover Slide Working capital turnover = Sales revenue Working capital Working capital is current assets minus current liabilities Working capital turnover = $6,295.4 $30.5 Working capital turnover = 206 times

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Days’ Payables Slide Days’ payables Operating payables Pretax cash expenses/365 = Days’ payables $760.5 $4,996.1/365 = $ $ $ $141.4 $ $ $ $141.4 Days’ payables = 56 days Operating payables include accounts payable, accrued wages and payroll taxes, and other items that represent deferred payments for operating expenses.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Receivables conversion period (days’ receivables)31 Plus: inventory conversion period (days’ inventory49 Operating cycle80 Less: payment deferral period (days’ payable)56 Cash conversion cycle24 Receivables conversion period (days’ receivables)31 Plus: inventory conversion period (days’ inventory49 Operating cycle80 Less: payment deferral period (days’ payable)56 Cash conversion cycle24 Cash Conversion Cycle Slide Days The result of this calculation is a measure of liquidity; it also indicates the time interval for which additional short-term financing might be needed to support a spurt in sales.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Dividend Yield Slide Dividend yield = Dividends per share Market price per share Dividend yield = $1.32 $ Dividend yield =2.0 percent

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Dividend Payout Slide Dividend payout = $305.2 $680.7 Dividend payout = Dividends Net income Dividend payout = 45 percent

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Other Key Ratios Slide Days’ cash Cash Cash expenses/365 Days’ receivables Accounts receivable Sales/365 Days’ inventory Inventory Cost of sales/365

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Other Key Ratios Slide Inventory turnover Cost of Sales Inventory Current ratio Current assets Current liabilities Acid-test (quick) ratio Monetary current assets Current liabilities

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Other Key Ratios Slide Financial leverage ratio Assets Stockholders’ equity Debt/equity ratio Long-term liabilities Shareholders’ equity Times interest earned Pretax operating profit + Interest Interest

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Chapter 13 The End