Tài chính doanh nghiệp - Chapter 6: Financial statement analysis

Chapter 6Financial Statement Analysis© 2001 Prentice-Hall, Inc.Fundamentals of Financial Management, 11/eCreated by: Gregory A. Kuhlemeyer, Ph.D.Carroll College, Waukesha, WIFinancial Statement AnalysisFinancial StatementsA Possible Framework for AnalysisRatio AnalysisTrend AnalysisCommon-Size and Index AnalysisExamples of External Uses of Statement AnalysisTrade Creditors -- Focus on the liquidity of the firm.Bondholders -- Focus on the long-term cash flow of the firm.Shareholders -- Focus on the profitability and long-term health of the firm.Examples of Internal Uses of Statement AnalysisPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities.Control -- Focus on return on investment for various assets and asset efficiency.Understand -- Focus on understanding how suppliers of funds analyze the firm.Primary Types of Financial StatementsIncome StatementA summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.Balance SheetA summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.Basket Wonders’ Balance Sheet (Asset Side)a. How the firm stands on a specific date.b. What BW owned. c. Amounts owed by customers.d. Future expense items already paid.e. Cash/likely convertible to cash within 1 year.f. Original amount paid.g. Acc. deductions for wear and tear. Cash and C.E. $ 90 Acct. Rec.c 394 Inventories 696 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assetse $1,195 Fixed Assets (@Cost)f 1030 Less: Acc. Depr. g (329) Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223 Total Assets b $2,169Basket Wonders Balance Sheet (thousands) Dec. 31, 2003aBasket Wonders’ Balance Sheet (Liability Side)a. Note, Assets = Liabilities + Equity.b. What BW owed and ownership position. c. Owed to suppliers for goods and services.d. Unpaid wages, salaries, etc.e. Debts payable 1 year.g. Original investment. h. Earnings reinvested.Notes Payable $ 290 Acct. Payablec 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e $ 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock ($1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity $1,139 Total Liab/Equitya,b $2,169Basket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders’ Income Statementa. 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. Net Sales $ 2,211 Cost of Goods Sold b 1,599 Gross Profit $ 612 SG&A Expenses c 402 EBITd $ 210 Interest Expensee 59 EBT f $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in RE $ 53Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2003aFramework for Financial AnalysisAnalytical Tools UsedSources and Uses StatementStatement of Cash FlowsCash Budgets1. Analysis of the funds needs of the firm.Trend / Seasonal ComponentHow much funding will be required in the future?Is there a seasonal component?Framework for Financial AnalysisHealth of a FirmFinancial Ratios 1. Individually 2. Over time 3. In combination 4. In comparison1. Analysis of the funds needs of the firm.2. Analysis of the financial condition and profitability of the firm.Framework for Financial AnalysisExamples:Volatility in salesVolatility in costsProximity to break-even point1. Analysis of the funds needs of the firm.2. Analysis of the financial condition and profitability of the firm.3. Analysis of the business risk of the firm.Business risk relates to the risk inherent in the operations of the firm.Framework for Financial AnalysisA Financial Manager must consider all three jointly when determining the financing needs of the firm.Determiningthe financingneeds of the firm.1. Analysis of the funds needs of the firm.2. Analysis of the financial condition and profitability of the firm.3. Analysis of the business risk of the firm.Framework for Financial AnalysisNegotiationswithsuppliers ofcapital.Determiningthe financingneeds of the firm.1. Analysis of the funds needs of the firm.2. Analysis of the financial condition and profitability of the firm.3. Analysis of the business risk of the firm.Use of Financial RatiosTypes of ComparisonsInternal ComparisonsExternal ComparisonsA Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.External Comparisons and Sources of Industry RatiosExamples:Robert Morris AssociatesDun & BradstreetAlmanac of Business and Industrial Financial RatiosThis involves comparing the ratios of one firm with those of similar firms or with industry averages.Similarity is important as one should compare “apples to apples.”Liquidity RatiosCurrentCurrent AssetsCurrent LiabilitiesFor Basket Wonders December 31, 2003Shows a firm’s ability to cover its current liabilities with its current assets.Balance Sheet RatiosLiquidity Ratios$1,195$500= 2.39Liquidity Ratio ComparisonsBW Industry2.39 2.152.26 2.091.91 2.01Year200320022001Current RatioRatio is stronger than the industry average.Liquidity RatiosAcid-Test (Quick)Current Assets - InvCurrent LiabilitiesFor Basket Wonders December 31, 2003Shows a firm’s ability to meet current liabilities with its most liquid assets.Balance Sheet RatiosLiquidity Ratios$1,195 - $696$500= 1.00Liquidity Ratio ComparisonsBW Industry1.00 1.251.04 1.231.11 1.25Year200320022001Acid-Test RatioRatio is weaker than the industry average.Summary of the Liquidity Ratio ComparisonsStrong 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. Ratio BW IndustryCurrent 2.39 2.15Acid-Test 1.00 1.25Current Ratio -- Trend Analysis Comparison Acid-Test Ratio -- Trend Analysis Comparison Summary of the Liquidity Trend AnalysesThe current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable.This indicates that inventories are a significant problem for BW.The current ratio for BW has been rising at the same time the acid-test ratio has been declining.Financial Leverage RatiosDebt-to-EquityTotal DebtShareholders’ EquityFor Basket Wonders December 31, 2003Shows the extent to which the firm is financed by debt.Balance Sheet RatiosFinancial LeverageRatios$1,030$1,139= .90Financial Leverage Ratio ComparisonsBW Industry .90 .90 .88 .90 .81 .89Year200320022001Debt-to-Equity RatioBW has average debt utilizationrelative to the industry average.Financial Leverage RatiosDebt-to-Total-AssetsTotal DebtTotal AssetsFor Basket Wonders December 31, 2003Shows the percentage of the firm’s assets that are supported by debt financing.Balance Sheet RatiosFinancial LeverageRatios$1,030$2,169= .47Financial Leverage Ratio ComparisonsBW Industry .47 .47 .47 .47 .45 .47Year200320022001Debt-to-Total-Asset RatioBW has average debt utilizationrelative to the industry average.Financial Leverage RatiosTotal CapitalizationTotal DebtTotal CapitalizationFor Basket Wonders December 31, 2003Shows the relative importance of long-term debt to the long-term financing of the firm.Balance Sheet RatiosFinancial LeverageRatios$1,030$1,669= .62(i.e., LT-Debt + Equity)Financial Leverage Ratio ComparisonsBW Industry .62 .60 .62 .61 .67 .62Year200320022001Total Capitalization RatioBW has average long-term debt utilizationrelative to the industry average.Coverage RatiosInterest CoverageEBITInterest ChargesFor Basket Wonders December 31, 2003Indicates a firm’s ability to cover interest charges.Income StatementRatiosCoverage Ratios$210$59= 3.56Coverage Ratio Comparisons BW Industry 3.56 5.19 4.35 5.0210.30 4.66Year200320022001Interest Coverage RatioBW has below average interest coveragerelative to the industry average.Coverage Ratio -- Trend Analysis Comparison Summary of the Coverage Trend AnalysisThis indicates that low earnings (EBIT) may be a potential problem for BW.Note, we know that debt levels are in line with the industry averages.The interest coverage ratio for BW has been falling since 2001. It has been below industry averages for the past two years.Activity RatiosReceivable TurnoverAnnual Net Credit SalesReceivablesFor Basket Wonders December 31, 2003Indicates quality of receivables and how successful the firm is in its collections.Income Statement /Balance SheetRatiosActivity Ratios$2,211$394= 5.61(Assume all sales are credit sales.)Activity RatiosAvg Collection PeriodDays in the YearReceivable TurnoverFor Basket Wonders December 31, 2003Average number of days that receivables are outstanding.(or RT in days)Income Statement /Balance SheetRatiosActivity Ratios3655.61= 65 daysActivity Ratio ComparisonsBW Industry65.0 65.771.1 66.383.6 69.2Year200320022001Average Collection PeriodBW has improved the average collection period to that of the industry average.Activity RatiosPayable Turnover (PT)Annual Credit PurchasesAccounts PayableFor Basket Wonders December 31, 2003Indicates the promptness of payment to suppliers by the firm.Income Statement /Balance SheetRatiosActivity Ratios$1551$94= 16.5(Assume annual credit purchases = $1,551.)Activity RatiosPT in DaysDays in the YearPayable TurnoverFor Basket Wonders December 31, 2003Average number of days that payables are outstanding. Income Statement /Balance SheetRatiosActivity Ratios36516.5= 22.1 daysActivity Ratio ComparisonsBW Industry22.1 46.725.4 51.143.5 48.5Year200320022001Payable Turnover in DaysBW has improved the PT in Days.Is this good?Activity RatiosInventory TurnoverCost of Goods SoldInventoryFor Basket Wonders December 31, 2003Indicates the effectiveness of the inventory management practices of the firm. Income Statement /Balance SheetRatiosActivity Ratios$1,599$696= 2.30Activity Ratio ComparisonsBW Industry2.30 3.452.44 3.762.64 3.69Year200320022001Inventory Turnover RatioBW has a very poor inventory turnover ratio.Inventory Turnover Ratio --Trend Analysis Comparison Activity RatiosTotal Asset TurnoverNet SalesTotal AssetsFor Basket Wonders December 31, 2003Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement /Balance SheetRatiosActivity Ratios$2,211$2,169= 1.02Activity Ratio ComparisonsBW Industry1.02 1.171.03 1.141.01 1.13Year200320022001Total Asset Turnover RatioBW has a weak total asset turnover ratio.Why is this ratio considered weak?Profitability RatiosGross Profit MarginGross ProfitNet SalesFor Basket Wonders December 31, 2003Indicates the efficiency of operations and firm pricing policies. Income Statement /Balance SheetRatiosProfitability Ratios$612$2,211= .277Profitability Ratio ComparisonsBW Industry27.7% 31.1%28.7 30.831.3 27.6Year200320022001Gross Profit MarginBW has a weak Gross Profit Margin.Gross Profit Margin -- Trend Analysis Comparison Profitability RatiosNet Profit MarginNet Profit after TaxesNet SalesFor Basket Wonders December 31, 2003Indicates the firm’s profitability after taking account of all expenses and income taxes. Income Statement /Balance SheetRatiosProfitability Ratios$91$2,211= .041Profitability Ratio ComparisonsBW Industry4.1% 8.2%4.9 8.19.0 7.6Year200320022001Net Profit MarginBW has a poor Net Profit Margin.Net Profit Margin -- Trend Analysis Comparison Profitability RatiosReturn on InvestmentNet Profit after TaxesTotal AssetsFor Basket Wonders December 31, 2003Indicates the profitability on the assets of the firm (after all expenses and taxes). Income Statement /Balance SheetRatiosProfitability Ratios$91$2,160= .042Profitability Ratio ComparisonsBW Industry4.2% 9.8%5.0 9.19.1 10.8Year200320022001Return on InvestmentBW has a poor Return on Investment.Return on Investment –Trend Analysis Comparison Profitability RatiosReturn on EquityNet Profit after TaxesShareholders’ EquityFor Basket Wonders December 31, 2003Indicates the profitability to the shareholders of the firm (after all expenses and taxes). Income Statement /Balance SheetRatiosProfitability Ratios$91$1,139= .08Profitability Ratio Comparisons BW Industry 8.0% 17.9% 9.4 17.216.6 20.4Year200320022001Return on EquityBW has a poor Return on Equity.Return on Equity -- Trend Analysis Comparison Return on Investment and the Du Pont ApproachROI2003 = .041 x 1.02 = .042 or 4.2%ROIIndustry = .082 x 1.17 = .098 or 9.8%ROI = Net profit margin X Total asset turnoverEarning Power = Sales profitability X Asset efficiencyReturn on Equity and the Du Pont ApproachROE2003 = .041 x 1.02 x 1.90 = .080ROEIndustry = .082 x 1.17 x 1.88 = .179Return On Equity = Net profit margin X Total asset turnover X Equity MultiplierEquity Multiplier = Total AssetsShareholders’ EquitySummary of the Profitability Trend AnalysesThe profitability ratios for BW have ALL been falling since 2001. Each has been below the industry averages for the past three years.This indicates that COGS and administrative costs may both be too high and a potential problem for BW.Note, this result is consistent with the low interest coverage ratio.Summary of Ratio AnalysesInventories are too high.May be paying off creditors (accounts payable) too soon.COGS may be too high.Selling, general, and administrative costs may be too high.Common-size AnalysisAn analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues.Basket Wonders’ Common Size Balance SheetsBasket Wonders’ Common Size Balance SheetsBasket Wonders’ Common Size Income StatementsIndex AnalysesAn analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year.Basket Wonders’ Indexed Balance SheetsBasket Wonders’ Indexed Balance SheetsBasket Wonders’ Indexed Income Statements