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INTERNAL ASSESSMENT FINANCE/ACCOUNTING THREE DECISION AREAS; INVESTMENT DECISION- WHAT ASSETS TO BUY FINANCING DECISION- WHAT IS THE BEST CAPITAL STRUCTURE.

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Presentation on theme: "INTERNAL ASSESSMENT FINANCE/ACCOUNTING THREE DECISION AREAS; INVESTMENT DECISION- WHAT ASSETS TO BUY FINANCING DECISION- WHAT IS THE BEST CAPITAL STRUCTURE."— Presentation transcript:

1 INTERNAL ASSESSMENT FINANCE/ACCOUNTING THREE DECISION AREAS; INVESTMENT DECISION- WHAT ASSETS TO BUY FINANCING DECISION- WHAT IS THE BEST CAPITAL STRUCTURE OPERATING DECISION- HOW TO OPERATE THE ASSETS OF THE FIRM IN THE MOST EFFICIENT MANNER

2 RATIO ANALYSIS PROVIDE A PICTURE AT A POINT IN TIME MEASURES STRENGTH AND WEAKNESS CAN PROVIDE A COMPARISON WITH INDUSTRY NORMS PROVIDES A COMPARISON WITH INDUSTRY LEADERS NEEDS TO BE LOOKED AT OVER TIME

3 TYPES OF FINANCIAL RATIOS LIQUIDITY-MEASURES ABILITY TO PAY SHORT TERM DEBT LEVERAGE - THE EXTENT OF DEBT IN THE CAPITAL STRUCTURE ACTIVITY- HOW EFFECTIVELY A FIRM USES ITS ASSETS PROFITABILITY- HOW MUCH VALUE DOES THE FIRM CREATE GROWTH-MEASURES THE FIRM’S ABILITY TO MAINTAIN ITS ECONOMIC POSITION

4 LIQUIDITY RATIOS CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES 1984 = 1.90 1989 = 1.99 1998 = 1.39 NESTLE, 1998 = 1.18 CAMPBELL’S, 1998 =.52

5 LEVERAGE RATIOS DEBT TO ASSETS- TOTAL DEBTS/ TOTAL ASSETS(%) 1984 = 13.62 1989 = 13.99 1998 = 70.4.03 NESTLE, 1998 = 59.2 CAMPBELL’S, 1998 = 85.5 DEBT TO EQUITY- TOTAL DEBT/ EQUITY 1984 =.18 1989 =.23 1998 = 2.26 NESTLE, 1998 = 2.45 CAMPBELL’S, 1998 =.85

6 ACTIVITY RATIOS TOTAL ASSET TURNOVER- SALES/TOTAL ASSETS 1984 = 1.80 1989 = 1.35 1998 = 1.30 NESTLE, 1998 = 1.27 CAMPBELL’S, 1998 = 1.19

7 PROFITABILITY RATIOS NET PROFIT MARGIN- NET INCOME/ SALES 1984 = 5.74% 1989 = 7.07% 1998 = 7.66% NESTLE, 1998 = 5.98% CAMPBELL’S, 1998 = 9.86% RETURN ON EQUITY 1984 = 16.44% 1989 = 16.12% 1998 = 32.7% NESTLE, 1998 = 18.6% CAMPBELL’S, 1998 = 75.5%

8 GROWTH RATIOS EPS= NET INCOME/ NO. SHARES OUTSTANDING HERSHEY NESTLE CAMPBELL’S 1998 2.38 3.48 3.83 5 YR. AVE. 1.69 3.14 2.80

9 RETURN ON EQUITY EFFECTIVENESS X EFFICIENCY X LEVERAGE = RETURN ON EQUITY (SALES/ TOTAL ASSETS) X (NET INCOME/ SALES) X (TOTAL ASSETS/ EQUITY) = ROE HERSHEY, 1998 (000) (4435/3404) X (340/4435) X (3404/1042) = 32.7%

10 PHARMACEUTICALS Novartis.196.167 Schering Plough.439.213 Warner-Lambert.347.105 American Home.257.134 Merck.41.20 Pfizer.38.196 Watson.16.278 COMPANY 1998 1996/1995

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