Download presentation
Presentation is loading. Please wait.
1
Copyright © 1999 Addison Wesley Longman
CHAPTER CHAPTER 14 Financial Statement and Ratio Analysis Copyright © 1999 Addison Wesley Longman 1
2
Objectives Why use ratios Methods of analysis Most common ratios
DuPont method
3
Ratios—the conversion of financial data so that:
One firm can be compared to itself in a prior period One firm can be compared to another
4
Table 14.1 Sources of Financial Information
SEC Registration Statement 10-K 10-Q 8-K Disclosure Internet sites
5
FIGURE 14.1 Valueline Report on K-Mart
6
FIGURE 14.2 Standard & Poor’s Report on K-Mart
7
The Goals of Financial Analysis
Identify company problems Identify company strengths
8
Types of Analysis 1. Cross Sectional
A comparison to other, similar firms
9
FIGURE 14.3 Sample of Industry Ratios
10
Cross Sectional Analysis
Looking up by SIC may not provide a good match
11
Table 14.5 Primary and Secondary SIC Codes for Xerox Corp.
Primary SIC Code: 3861 Photographic Equipment and Supplies SIC Codes: 3579 Office Machines 6331 Fire, Marine, and Casualty Insurance 6159 Miscellanous Business Credit Institutions
12
5111 Printing and Writing Paper 6311 Life Insurance
6211 Security Brokers and Dealers 6311 Life Insurance 6331 Fire, Marine, and Casualty Insurance 6159 Miscellanous Business Credit Institutions
13
Time Series Analysis A comparison of a firm to itself in earlier periods
14
Common Sized Financial Statements
1. Balance Sheet Divide all lines by total assets 2. Income Statement Divide all lines by sales
15
Ratio Categories Profitability ratios Liquidity ratios Activity ratios
Financing ratios Market ratios
16
Profitability Ratios Measure how effectively the firm uses its resources to generate income Note: The following examples are based on the Risky Ventures Income Statement and Balance Sheet found in your text.
17
Return on Equity What a firm earns on every dollar of equity
18
Table 14.8 Return on Equity Company Texaco 23% 8% 11% 9% Wendy’s Applebee’s General Motors
19
Gross Profit Margin The gross profit earned on each dollar of sales
20
Table 14.10 Gross Profit Margin
Company Texaco 21% 22% 25% 25% Wendy’s Applebee’s General Motors
21
Operating Profit Margin
The operating profit per dollar of sales operating profit margin = operating profits sales $4 $30 = .13
22
Table 14.11 Operating Profit Margin
Company Texaco 10% 8% 11% 13% Wendy’s Applebee’s General Motors
23
Net Profit Margin The percentage of each dollar that remains after all costs have been paid.
24
Table 14.12 Net Profit Margin
Company Texaco 5% 2% 3% 3% Wendy’s Applebee’s General Motors
25
Liquidity Ratios Measure how well a firm will be able to meet its short-term obligations
26
Current Ratio The ratio of assets then can be converted to cash within one year to liabilities that must be paid within one year
27
Current Ratio Current assets Current ratio = Current liabilities
(14.6) $23.5 $16.5 = 1.42
28
Quick Ratio Like the current ratio, but inventory is excluded from current assets (14.7) Current assets – Inventory Current liabilities $23.5 – $7.5 $16.5 = 0.97 Quick ratio =
29
Net Working Capital Is not a ratio, and therefore cannot be used cross-sectionally
30
Activity Ratios Measure the efficiency with which assets are converted to sales or cash
31
Inventory Turnover How many times per year the inventory is completely sold and replaced Inventory turnover = Cost of goods sold Inventory $21 $7.5 = 2.8
32
Table 14.16 Inventory Turnover Ratios
Company Texaco Wendy’s Applebee’s General Motors
33
Fixed Asset Turnover Measures how effectively fixed assets are being used
34
Table 14.17 Fixed Asset Turnover
Company Texaco Wendy’s Applebee’s General Motors
35
Total Asset Turnover Measures how all assets are being used to generate sales
36
Table 14.18 Total Asset Turnover Ratios
Company Texaco Wendy’s Applebee’s General Motors
37
Accounts Receivable Turnover
The number of times per year accounts receivable are paid and replaced
38
Table 14.19 Accounts Receivable Turnover
Company Texaco Wendy’s Applebee’s General Motors
39
Average Collection Period
The average number of days it requires the firm to collect on receivables
40
Table 14.20 Average Collection Period Ratios
Company Texaco Wendy’s Applebee’s General Motors
41
Average Payment Period
The average number of days required to pay bills = $ 8 ($21/365) = 139
42
Table 14.21 Average Payment Period Ratios
Company Texaco Wendy’s Applebee’s General Motors
43
Financing Ratios Measure how leveraged a firm is
44
Debt Ratio The proportion of assets financed with debt
Total Liabilities Total Assets $ $50 Debt ratio = = .73
45
Table Debt Ratios Company Texaco Wendy’s Applebee’s General Motors
46
Debt-Equity Ratio The ratio between suppliers of long-term capital
47
Table 14.23 Debt–Equity Ratios
Company Texaco Wendy’s Applebee’s General Motors
48
Times Interest Earned Measures the firm’s ability to meet its interest payments Or the number of times per year a firm can pay its interest bill
49
Times Interest Earned
50
Table 14.24 Times Interest Earned Ratios
Company Texaco Wendy’s Applebee’s General Motors NA NA
51
Market Ratios Are partly based on stock and stock prices.
52
Earnings Per Share The net income per share of stock outstanding
EPS = Net income Number of shares outstanding (14.19) EPS = $1.2 – $ $1 = 1
53
Table 14.25 Earnings per Share Ratios
Company Texaco Wendy’s Applebee’s General Motors
54
Price Earnings Ratio The amount investors are willing to pay for $1 of earnings from the firm
55
Table 14.26 Price/Earnings Ratio
Company Texaco Wendy’s Applebee’s General Motors
56
Market-to-Book Ratio Measures how much above or below book value the market values a firm’s stock
57
Table 14.27 Market-to-Book Ratio
Company Texaco Wendy’s Applebee’s General Motors
58
Steps to Ratio Analysis
Compute ratios Organize into groups by type Gather historical ratios and industry data
59
Review ratios by type looking for deviations from the norms
Look for confirmation of problem in other ratio types
60
DuPont Analysis ROE = net profit margin x total asset turnover x equity multiplier
61
FIGURE DuPont Ratio 3
Similar presentations
