Analyzing Financial Statements

General Rules 1) Restate balance sheet to work with capital. 2) Use averages (current and previous year) for balance sheet items. 3) Be consistent.

Traditional Method Current assets Fixed Assets Cash Receivables Inventory Fixed Assets Net Property Plant and Equipment (NPPE) Investments -------------------------------------------------- Total Assets

Traditional Method Current Liabilities Long Term Liabilities Notes Payable Accounts Payable Other Payables Long Term Liabilities L.T. Debt Other Liabilities Shareholder Equity -------------------------------------------------- Total Liabilities and Equity

Capital Method Current Assets Less : Operating Current Liabilities Cash Receivables Inventory Less : Operating Current Liabilities Accounts Payable Other Payables -------------------------------------------------- Operating Working Capital

Capital Method Operating Working Capital Fixed Assets Net Property Plant and Equipment (NPPE) Investments -------------------------------------------------- Total Capital

Capital Method Short Term Debt Long Term Liabilities Notes Payable Long Term Liabilities L.T. Debt Other Liabilities Shareholder Equity -------------------------------------------------- Total Debt and Equity

Leverage Ratios Debt Ratio = (Int. Bearing + Leases) / (Capital + Leases) Debt-Equity Ratio = (Int. Bearing + Leases) / Equity Times Interest Earned = (EBIT + Depreciation) / Interest Leverage Ratio = Capital / Equity

Liquidity Ratios Current Ratio = Current Assets / Current Liabilities Acid Test Ratio = (Curr Assets – Inv) / Curr Liabs Working Capital to Assets = Working Capital / Capital

Efficiency Ratios Total Asset Turnover = Sales / Capital (TATO) Sales to W. Capital = Sales / Working Capital Fixed Asset T/O = Sales / Fixed Assets Inventory T/O = Cost of Goods Sold / Inventory

Efficiency Ratios Avg Collection Period = Acc Rec / (Sales / 365) Avg Payment Period = Acc Payable / (COS / 365) Inventory Days = 365/(Inv T/O) Cash Cycle = Inv Days + ACP - APP

Profitability Ratios Return on Assets (ROA) = Net Pft after Tax / Capital Return on Equity (ROE) = Net Pft after Tax / Equity Operating Return on Assets = EBIT / Capital

Profitability Ratios Net Profit Margin (NPM) = Net Pft after Tax / Sales Gross Pft Margin (GPM) = Gross Pft / Sales Expenses to Sales = SGA / Sales

Investment Ratios Payout Ratio = Divs per Share / Earnings per Share Retention Ratio = 1 – Payout Ratio Price–Earnings Ratio (P/E) = Stock Price / EPS Market to Book Ratio = Stock Price Book Value per Share

Approaches Time Series Cross-section (Comparables -- i.e., Industry or Specific Competitors) Goals / Targets

Other Methods Common Size Index Analysis Balance sheet (as % of capital) Income statement (as % of sales) Index Analysis as % of base year

DuPont Analysis ROE = Leverage x ROA ROA = NPM x TATO

Value Drivers Sales growth Operating profit margin Tax rate Investment rate = [(NPPE + WCAP) / Sales ] WACC Competitive advantage period

Value Drivers ROIC = Net Operating Profit after Tax / Capital = EBIT (1-T) / Capital = EBIT (1-T) / Sales x Sales / Capital = NPM x TATO

Reebok Example See the Reebok Excel File