FundamentalsofFinancialManagement-CHAPTER3AnalysisofFinancialStatements.ppt

3 - 1 copyright 2001 by harcourt, inc.all rights reserved. nratio analysis ndu pont system neffects of improving ratios nlimitations of ratio analysis nqualitative factors chapter 3 analysis of financial statements 3 - 2 copyright 2001 by harcourt, inc.all rights reserved. balance sheet: assets 2001e2000 cash85,6327,282 ar878,000632,160 inventories1,716,4801,287,360 total ca2,680,1121,926,802 gross fa1,197,1601,202,950 less: deprec. 380,120 263,160 net fa 817,040 939,790 total assets3,497,1522,866,592 3 - 3 copyright 2001 by harcourt, inc.all rights reserved. liabilities and equity 2001e2000 accounts payable436,800524,160 notes payable600,000720,000 accruals 408,000 489,600 total cl1,444,8001,733,760 long-term debt500,0001,000,000 common stock1,680,936460,000 retained earnings (128,584) (327,168) total equity1,552,352 132,832 total l facilitate comparisons nused to highlight weaknesses and strengths why are ratios useful? 3 - 7 copyright 2001 by harcourt, inc.all rights reserved. nliquidity: can we make required payments? nasset management: right amount of assets vs. sales? what are the five major categories of ratios, and what questions do they answer? 3 - 8 copyright 2001 by harcourt, inc.all rights reserved. ndebt management: right mix of debt and equity? nprofitability: do sales prices exceed unit costs, and are sales high enough as reflected in pm, roe, and roa? nmarket value: do investors like what they see as reflected in p/e and m/b ratios? 3 - 9 copyright 2001 by harcourt, inc.all rights reserved. calculate dleons forecasted current and quick ratios for 2001. cr01 = = = 1.85x. qr01 = = = 0.67x. ca cl $2,680 $1,445 $2,680 $1,716 $1,445 ca - inv. cl 3 - 10 copyright 2001 by harcourt, inc.all rights reserved. nexpected to improve but still below the industry average. nliquidity position is weak. comments on cr and qr 200120001999ind. cr1.85x1.1x2.3x2.7x qr0.67x0.4x0.8x1.0x 3 - 11 copyright 2001 by harcourt, inc.all rights reserved. inv. turnover = = = 4.10x. sales inventories $7,036 $1,716 what is the inventory turnover ratio vs. the industry average? 200120001999ind. inv. t. 4.1x4.5x4.8x6.1x 3 - 12 copyright 2001 by harcourt, inc.all rights reserved. ninventory turnover is below industry average. ndleon might have old inventory, or its control might be poor. nno improvement is currently forecasted. comments on inventory turnover 3 - 13 copyright 2001 by harcourt, inc.all rights reserved. receivables average sales per day dso = = = = 44.9. dso is the average number of days after making a sale before receiving cash. receivables sales/360 $878 $7,036/360 3 - 14 copyright 2001 by harcourt, inc.all rights reserved. appraisal of dso n dleon collects too slowly, and is getting worse. n dleon has a poor credit policy. 200120001999ind. dso 44.9 39.0 36.8 32.0 3 - 15 copyright 2001 by harcourt, inc.all rights reserved. f.a. and t.a. turnover vs. industry average fixed assets turnover sales net fixed assets = = = 8.61x. $7,036 $817 total assets turnover sales total assets = = = 2.01x. $7,036 $3,497 3 - 16 copyright 2001 by harcourt, inc.all rights reserved. nfa turnover projected to exceed industry average. good. nta turnover not up to industry average. caused by excessive current assets (a/r and inv.) 2001 2000 1999ind. fa to 8.6x6.2x10.0x7.0x ta to 2.0x2.0x2.3x2.6x 3 - 17 copyright 2001 by harcourt, inc.all rights reserved. calculate the debt ratio, tie, and ebitda coverage ratios. total debt total assets debt ratio = = = 55.6%. $1,445 + $500 $3,497 ebit int. expense tie = = = 5.8x. $510.6 $88 3 - 18 copyright 2001 by harcourt, inc.all rights reserved. ebitda coverage = = = 5.2x. ebitda + lease payments (in cash) interest lease loan expense pmt. repayments + + $510.6 + $117.0 + $40 $88 + $40 + $0 3 - 19 copyright 2001 by harcourt, inc.all rights reserved. too much debt, but projected to improve. how do the debt management ratios compare with industry averages? 200120001999 ind. d/a55.6% 95.4% 54.8% 50.0% tie 5.8x -3.9x 3.3x 6.2x ebitda coverage 5.2x -3.3x 3.6x 8.0x 3 - 20 copyright 2001 by harcourt, inc.all rights reserved. very bad in 2000, but projected to exceed industry average in 2001. looking good. profit margin vs. industry average? 200120001999 ind. p.m.3.6%-8.9%2.6% 3.5% p.m. = = = 3.6%. ni sales $253.6 $7,036 3 - 21 copyright 2001 by harcourt, inc.all rights reserved. bep= = = 14.6%. bep vs. industry average? ebit total assets $510.6 $3,497 3 - 22 copyright 2001 by harcourt, inc.all rights reserved. nbep removes effect of taxes and financial leverage. useful for comparison. nprojected to be below average. nroom for improvement. 200120001999ind. bep14.6%-24.1% 14.2%19.1% 3 - 23 copyright 2001 by harcourt, inc.all rights reserved. return on assets roa= = = 7.3%. net income total assets $253.6 $3,497 3 - 24 copyright 2001 by harcourt, inc.all rights reserved. roe = = = 16.3%. net income common equity $253.6 $1,552 2001 20001999ind. roa 7.3% -18.1% 6.0% 9.1% roe16.3%-391.4% 13.3%18.2% both below average but improving. 3 - 25 copyright 2001 by harcourt, inc.all rights reserved. nroa is lowered by debt-interest lowers ni, which also lowers roa = ni/assets. nbut use of debt lowers equity, hence could raise roe = ni/equity. effects of debt on roa and roe 3 - 26 copyright 2001 by harcourt, inc.all rights reserved. calculate and appraise the p/e, p/cf, and m/b ratios. price = $12.17. eps = = = $1.01. p/e = = = 12x. ni shares out. $253.6 250 price per share eps $12.17 $1.01 3 - 27 copyright 2001 by harcourt, inc.all rights reserved. industryp/e ratio banking 17.15 computer software services 33.01 drug 41.81 electric utilities (eastern u.s.) 19.40 internet services* 290.35 semiconductors 78.41 steel 12.71 tobacco 11.59 water utilities 21.84 typical industry average p/e ratios * because many internet companies have negative earnings and no p/e, there was only a small sample of internet companies. 3 - 28 copyright 2001 by harcourt, inc.all rights reserved. ni + depr. shares out. cf per share = = = $1.48. $253.6 + $117.0 250 price per share cash flow per share p/cf = = = 8.21x. $12.17 $1.48 3 - 29 copyright 2001 by harcourt, inc.all rights reserved. com. equity shares out. bvps = = = $6.21. $1,552 250 mkt. price per share book value per share m/b = = = 1.96x. $12.17 $6.21 3 - 30 copyright 2001 by harcourt, inc.all rights reserved. np/e: how much investors will pay for $1 of earnings. high is good. np/cf: how much investors will pay for $1 of cash flow. high is good. nm/b: how much paid for $1 of bv. higher is better. np/e and m/b are high if roe is high, risk is low. 2001 20001999 ind. p/e12.0x-0.4x 9.7x14.2x p/cf8.21x-0.6x 8.0x11.0x m/b1.96x 1.7x 1.3x 2.4x 3 - 31 copyright 2001 by harcourt, inc.all rights reserved. ( )( )( ) = roe x x = roe. profit margin ta turnover equity multiplier ni sales sales ta ta ce 19992.6% x2.3x2.2 =13.3% 2000-8.9% x2.0x 21.6 = -391.4% 20013.6% x2.0x2.3 =16.3% ind.3.5% x2.6x2.0 =18.2% 3 - 32 copyright 2001 by harcourt, inc.all rights reserved. the du pont system focuses on: nexpense control (p.m.) nasset utilization (tato) ndebt utilization (eq. mult.) it shows how these factors combine to determine the roe. 3 - 33 copyright 2001 by harcourt, inc.all rights reserved. simplified dleon data a/r878 debt1,945 other ca1,802 equity1,552 net fa 817 total assets $3,497 l lower interest, hence higher ni. nall these actions would improve stock price. 3 - 37 copyright 2001 by harcourt, inc.all rights reserved. what are some potential problems and limitations of financial ratio analysis? ncomparison with industry averages is difficult if the firm operates many different divisions. 3 - 38 copyright 2001 by harcourt, inc.all rights reserved. n“average” performance not necessarily good. nseasonal factors can distort ratios. n“window dressing” tech