1. 4-1 Business Finance (MGT 232) Lecture 21

2. 4-2 Financial Statement Analysis

3. 4-3 Financial Statements A Possible Framework for Analysis Ratio Analysis Five major categories of ratios Overview of the Last Lecture

4. 4-4 What are the five major categories of ratios, and what questions do they answer? Liquidity: Can we make required payments in the short run? Asset management: right amount of assets vs. sales? Debt management, leverage: Right mix of debt and equity? Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? Market value: Do investors like what they see as reflected in P/E and M/B ratios?

5. 4-5 Liquidity Ratios Current Ratio Current Assets Current Liabilities For Basket Wonders December 31, 2013 Current Ratio Current Assets Current Liabilities For Basket Wonders December 31, 2013 Shows a firm’s ability to cover its current liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios

6. 4-6 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

7. 4-7 Liquidity Ratio Comparisons BW Industry 2.15 2.262.09 1.912.01 BW Industry 2.15 2.262.09 1.912.01 Year 2013 2012 2011 Current Ratio Ratio is stronger than the industry average.

8. 4-8 Liquidity Ratios Acid-Test (Quick) Current Assets - Inv Current Liabilities For Basket Wonders December 31, 2013 Acid-Test (Quick) Current Assets - Inv Current Liabilities For Basket Wonders December 31, 2013 Shows a firm’s ability to meet current liabilities with its most liquid assets. Balance Sheet Ratios Liquidity Ratios

9. 4-9 Liquidity Ratio Comparisons BW Industry 1.25 1.041.23 1.111.25 BW Industry 1.25 1.041.23 1.111.25 Year 2013 2012 2011 Acid-Test Ratio Ratio is weaker than the industry average.

10. 4-10 Liquidity Ratios Net Working Capital Current - Current Assets Liabilities Assets Liabilities For Basket Wonders December 31, 2013 Net Working Capital Current - Current Assets Liabilities Assets Liabilities For Basket Wonders December 31, 2013 Shows a safety cushion for the firm. +ive NWC is a good sign that firm can sell assets to pay debts Balance Sheet Ratios Liquidity Ratios

11. 4-11 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

12. 4-12 Liquidity Ratio Comparisons BW Industry 654 550575 428445 BW Industry 654 550575 428445 Year 2013 2012 2011 Net Working Capital Ratio is stronger than the industry average.

13. 4-13 Summary of the Liquidity Ratio Comparisons Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. RatioBWIndustry RatioBWIndustry Current2.39 2.15 Acid-Test 1.00 1.25

14. 4-14 Current Ratio -- Trend Analysis Comparison

15. 4-15 Acid-Test Ratio -- Trend Analysis Comparison

16. 4-16 Summary of the Liquidity Trend Analysis industry The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable. inventories BW This indicates that inventories are a significant problem for BW. industry The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable. inventories BW This indicates that inventories are a significant problem for BW. BW u The current ratio for BW has been rising at the same time the acid-test ratio has been declining.

17. 4-17 Financial Leverage Ratios Debt-to-Equity Total Debt Shareholders’ Equity For Basket Wonders December 31, 2013Debt-to-Equity Total Debt Shareholders’ Equity For Basket Wonders December 31, 2013 Shows the extent to which the firm is financed by debt. Balance Sheet Ratios Financial Leverage Ratios Rs.1,030Rs.1,139.90 =.90

18. 4-18 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

19. 4-19 Financial Leverage Ratio Comparisons BW Industry.90.90.88.90.81.89 BW Industry.90.90.88.90.81.89 Year 2013 2012 2011 Debt-to-Equity Ratio BW has average debt utilization relative to the industry average.

20. 4-20 Financial Leverage Ratios Debt-to-Total-Assets Total Debt Total Assets For Basket Wonders December 31, 2013Debt-to-Total-Assets Total Debt Total Assets For Basket Wonders December 31, 2013 Shows the percentage of the firm’s assets that are supported by debt financing. Balance Sheet Ratios Financial Leverage Ratios Rs.1,030Rs.2,169.47 =.47

21. 4-21 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

22. 4-22 Financial Leverage Ratio Comparisons BW Industry.47.47.45.47 BW Industry.47.47.45.47 Year 2013 2012 2011 Debt-to-Total-Asset Ratio BW has average debt utilization relative to the industry average.

23. 4-23 Financial Leverage Ratios Total Capitalization Total Debt Total Capitalization For Basket Wonders December 31, 2013 Total Capitalization Total Debt Total Capitalization For Basket Wonders December 31, 2013 Shows the relative importance of long-term debt to the long-term financing of the firm. Balance Sheet Ratios Financial Leverage Ratios Rs.1,030Rs.1,669.62 =.62 (i.e., LT-Debt + Equity)

24. 4-24 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

25. 4-25 Financial Leverage Ratio Comparisons BW Industry.62.60.62.61.67.62 BW Industry.62.60.62.61.67.62 Year 2013 2012 2011 Total Capitalization Ratio BW has average long-term debt utilization relative to the industry average.

26. 4-26 Coverage Ratios Interest Coverage EBIT Interest Charges For Basket Wonders December 31, 2013 Interest Coverage EBIT Interest Charges For Basket Wonders December 31, 2013 Indicates a firm’s ability to cover interest charges. Income Statement Ratios Coverage Ratios Rs.210Rs.59 3.56 = 3.56

27. 4-27 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b c f Increase in RE Rs. 53 Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBIT d Rs. 210 Interest Expense e 59 EBT f Rs. 151 Income Taxes 60 EAT g Rs. 91 Cash Dividends 38 Increase in RE Rs. 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 a

28. 4-28 Coverage Ratio Comparisons BW Industry 3.565.19 4.355.02 10.304.66 BW Industry 3.565.19 4.355.02 10.304.66 Year 2013 2012 2011 Interest Coverage Ratio BW has below average interest coverage relative to the industry average.

29. 4-29 Coverage Ratio -- Trend Analysis Comparison

30. 4-30 Summary of the Coverage Trend Analysis low earnings BW This indicates that low earnings (EBIT) may be a potential problem for BW. debt levels industry Note, we know that debt levels are in line with the industry averages. low earnings BW This indicates that low earnings (EBIT) may be a potential problem for BW. debt levels industry Note, we know that debt levels are in line with the industry averages. BW industry u The interest coverage ratio for BW has been falling since 2011. It has been below industry averages for the past two years.

31. 4-31 Asset Management ratios Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2013 Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2013 Indicates quality of receivables and how successful the firm is in its collections. Income Statement / Balance Sheet Ratios Asset Management ratios Rs.2,211Rs.394 5.61 = 5.61 (Assume all sales are credit sales.)

32. 4-32 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

33. 4-33 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b c f Increase in RE Rs. 53 Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBIT d Rs. 210 Interest Expense e 59 EBT f Rs. 151 Income Taxes 60 EAT g Rs. 91 Cash Dividends 38 Increase in RE Rs. 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 a

34. 4-34 Asset Management ratios Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2013 Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2013 Average number of days that receivables are outstanding. (or RT in days) Income Statement / Balance Sheet Ratios Asset Management ratios 3655.61 65 days = 65 days

35. 4-35 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

36. 4-36 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b c f Increase in RE Rs. 53 Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBIT d Rs. 210 Interest Expense e 59 EBT f Rs. 151 Income Taxes 60 EAT g Rs. 91 Cash Dividends 38 Increase in RE Rs. 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 a

37. 4-37 Asset Management Comparisons BW Industry 65.065.7 71.166.3 83.669.2 BW Industry 65.065.7 71.166.3 83.669.2 Year 2013 2012 2011 Average Collection Period BW has improved the average collection period to that of the industry average.

38. 4-38 Asset Management ratios Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2013 Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2013 Indicates the promptness of payment to suppliers by the firm. Income Statement / Balance Sheet Ratios Asset Management ratios Rs.1551Rs.94 16.5 = 16.5 (Assume annual credit purchases = Rs.1,551.)

39. 4-39 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

40. 4-40 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b c f Increase in RE Rs. 53 Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBIT d Rs. 210 Interest Expense e 59 EBT f Rs. 151 Income Taxes 60 EAT g Rs. 91 Cash Dividends 38 Increase in RE Rs. 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 a

41. 4-41 Asset Management ratios PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2013 PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2013 Average number of days that payables are outstanding. Income Statement / Balance Sheet Ratios Asset Management ratios 36516.5 22.1 days = 22.1 days

42. 4-42 Asset Management Ratio Comparisons BW Industry 22.146.7 25.451.1 43.548.5 BW Industry 22.146.7 25.451.1 43.548.5 Year 2013 2012 2011 Payable Turnover in Days BW has improved the PT in Days. Is this good?

43. 4-43 Asset Management ratios Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2013 Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2013 Indicates the effectiveness of the inventory management practices of the firm. Income Statement / Balance Sheet Ratios Asset Management ratios Rs.1,599Rs.696 2.30 = 2.30

44. 4-44 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

45. 4-45 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b c f Increase in RE Rs. 53 Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBIT d Rs. 210 Interest Expense e 59 EBT f Rs. 151 Income Taxes 60 EAT g Rs. 91 Cash Dividends 38 Increase in RE Rs. 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 a

46. 4-46 Asset Management Ratio Comparisons BW Industry 2.303.45 2.443.76 2.643.69 BW Industry 2.303.45 2.443.76 2.643.69 Year 2013 2012 2011 Inventory Turnover Ratio BW has a very poor inventory turnover ratio.

47. 4-47 Inventory Turnover Ratio -- Trend Analysis Comparison

48. 4-48 Asset Management ratios Total Asset Turnover Net Sales Total Assets For Basket Wonders December 31, 2013 Total Asset Turnover Net Sales Total Assets For Basket Wonders December 31, 2013 Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement / Balance Sheet Ratios Asset Management ratios Rs.2,211Rs.2,169 1.02 = 1.02

49. 4-49 Basket Wonders’ Balance Sheet (Asset Side) Cash and C.E. Rs. 90 c Acct. Rec. c 394 Inventories 696 d Current Assets e Rs. 1,195 f g Net Fix. Assets Rs. 701 Total Assets b Rs.2,169 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e Rs. 1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets Rs. 701 Investment, LT 50 Other Assets, LT 223 Total Assets b Rs.2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 Basket Wonders Balance Sheet (thousands) Dec. 31, 2013 a c d d Current Liab. e Rs. 500 f g g h Total Equity Rs. 1,139 Notes Payable Rs. 290 Acct. Payable c 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e Rs. 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock (Rs.1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity Rs. 1,139 Total Liab/Equity a,b Rs.2,169

50. 4-50 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b c f Increase in RE Rs. 53 Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBIT d Rs. 210 Interest Expense e 59 EBT f Rs. 151 Income Taxes 60 EAT g Rs. 91 Cash Dividends 38 Increase in RE Rs. 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013 a

51. 4-51 Asset Management Ratio Comparisons BW Industry 1.021.17 1.031.14 1.011.13 BW Industry 1.021.17 1.031.14 1.011.13 Year 2013 2012 2011 Total Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak?

52. 4-52 Summary A Possible Framework for Analysis Ratio Analysis – Liquidity Ratios – Leverage Ratio – Asset Management Ratio