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A
Ch 10 Tool Kit

F
12/30/2001

Chapter 10. Tool Kit for Analysis of Financial Statements

Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios of other
firms and by examining the trends in ratios over time. We can also combine ratios to make the analysis more revealing,
as is done with the DuPont analysis, and graphs can be used to facilitate trend analysis. Spreadsheet models such as the
one below are exceptionally useful for this type of analysis.
Note that financial analysis is generally the starting point for a forecast of future performance. We analyze historical
data, then plan changes in operations, and then forecast what results will be under the new operating plan. This is
where spreadsheets become REALLY useful, as we can make changes in assumptions and instantly see the results of
those changes. Thus, the Chapter 10 model is really a lead-in to the one for Chapter 11, where we get into forecasting.
Input Data:
2002
$23.00
50
40%
11.0%
$28
$20

2001
$26.00
50
40%
10.8%
$28
$20

Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets

2002
$10
$0
$375
$615
$1,000
$1,000
$2,000

2001
$15
$65
$315
$415
$810
$870
$1,680

Liabilities and equity

Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total debt
Preferred stock (400,000 shares)
Common stock (50,000,000 shares)
Retained earnings
Total common equity
Total liabilities and equity

$60
$110
$140
$310
$754
$1,064
$40
$130
$766
$896
$2,000

$30
$60
$130
$220
$580
$800
$40
$130
$710
$840
$1,680

2002
$3,000.0
$2,616.2
$383.8
$100.0
$283.8
$88.0
$195.8
$78.3
$117.5
$4.0
$113.5

2001
$2,850.0
$2,497.0
$353.0
$90.0
$263.0
$60.0
$203.0
$81.2
$121.8
$4.0
$117.8

Year-end common stock price

Year-end shares outstanding (in millions)
Tax rate
After-tax cost of capital
Lease payments
Required sinking fund payments
Balance Sheets
(in millions of dollars)

Income Statements
(in millions of dollars)
Net sales
Operating costs
Earnings before interest, taxes, & depr. (EBITDA)
Depreciation
Earnings before interest and taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income before preferred dividends
Preferred dividends
Net Income available to common stockholders

63
64

A
B
Common dividends
Addition to retained earnings

E
$57.5
$56.0

F
$53.0
$64.8

A
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Calculated Data: Operating Performance and Cash Flows

Net operating working capital (NOWC)
Total operating capital
Net Operating Profit After Taxes (NOPAT)
Net Cash Flow (Net income + Depreciation)
Operating Cash Flow (OCF)
Free Cash Flow (FCF)

2002
$800.0
$1,800.0
$170.3
$213.5
$270.3
($174.7)

2001
$585.0
$1,455.0
$157.8
$207.8
$247.8
N/A

2002
$2.27
$1.15
$17.92
$4.27
($3.49)

2001
$2.36
$1.06
$16.80
$4.16
N/A

2002

2001

Industry
Average

3.23
1.24

3.68
1.80

4.2
2.1

4.88
45.6
3.00
1.50

6.87
40.34
3.28
1.70

9
36
3
1.8

53.20%
3.23
3.03

47.62%
4.38
3.53

40.00%
6
8

3.78%
14.19%
5.67%
12.67%

4.13%
15.65%
7.01%
14.02%

5.00%
17.20%
9.00%
15.00%

10.13
5.39
1.28

11.04
6.26
1.55

12.5
6.8
1.7

Calculated Data: Per-share Information

Earnings per share (EPS)
Dividends per share (DPS)
Book value per share (BVPS)
Cash flow per share (CFPS)
Free cash flow per share (FCFPS)
Calculated Data: Ratios
Liquidity ratios
Current Ratio
Quick Ratio
Asset Management ratios
Inventory Turnover
Days Sales Outstanding
Fixed Asset Turnover
Total Asset Turnover
Debt Management ratios
Debt Ratio
Times Interest Earned
EBITDA Coverage Ratio
Profitability ratios
Profit Margin
Basic Earning Power
Return on Assets
Return on Equity
Market Value ratios
Price-to Earnings Ratio
Price-to-Cash Flow Ratio
Market-to-Book Ratio
Du Pont Analysis
MicroDrive
MicroDrive
Industry Average

ROE =
12.67%
14.02%
15.00%

2002
2001

P.M.
3.78%
4.13%
5.00%

T.A.T.O.
1.50
1.70
1.80

Note: Red tic

indicates comment
box. Put pointer on
cell to read it.

X Equity Multiplier
2.23
2.00
1.67

Trend Analysis--Graphing
A picture is said to be worth a thousand words, and a graph provides a picture of a set of data. We illustrate graphing
techniques here with a trend analysis of MicroDrive's ROE. We also assume that the industry average ROE is a constant. In
a more realistic problem, we would have more years of data, and historical data on the industry average, but our
purpose here is just to illustrate the technique.
We will make a "scatter diagram," with years on the horizontal axis and ROE on the vertical axis. First, we need
the data arranged in the proper order, with years in the first column and ROE's in the second one. This is shown below:
ROE
Years
2001
2002

MicroDrive
14.02%
12.67%

Industry
15.00%
15.00%

The graph below shows that MicroDrive's ROE is below that of the average firm in its industry, and is trending down. This is

ROE

A
B
C
D
127 bad, and management should take corrective actions. We discuss this in Chapter 11.
128
129
130
MicroDrive's ROE Vs. Industry
131
132
133
16.00%
134
14.00%
135
136
12.00%
137
138
10.00%
MicroDrive
139
140
8.00%
Industry
141
6.00%
142
143
4.00%
144
145
2.00%
146
147
0.00%
148
2001
2002
149

Common Size Analysis and Percent Change Analysis

In
In common
common size
size analysis,
analysis, all
all income
income statement items
items are
are divided
divided by
by sales,
sales, and
and all
all balance
balance sheet items
items are
are divided
divided by
by total
total
assets.
In
In percent
percent change
change analysis,
analysis, all
all items
items are
are expressed
expressed as
as aa percent change
change from
from the
the first
first year,
year, called
called the
the base
base year,
year, of the
the
analysis.

Common Sized Analysis

Balance Sheets
(in millions of dollars)

Common Size Balance Sheets

Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets

2001
$15
$65
$315
$415
$810
$870
$1,680

2002
$10
$0
$375
$615
$1,000
$1,000
$2,000

2001
0.9%
3.9%
18.8%
24.7%
48.2%
51.8%
100.0%

2002
0.5%
0.0%
18.8%
30.8%
50.0%
50.0%
100.0%

2002
Industry
1.0%
2.2%
17.8%
19.8%
40.8%
59.2%
100.0%

Liabilities and equity

Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total debt
Preferred stock (400,000 shares)
Common stock (50,000,000 shares)
Retained earnings
Total common equity
Total liabilities and equity

$30
$60
$130
$220
$580
$800
$40
$130
$710
$840
$1,680

$60
$110
$140
$310
$754
$1,064
$40
$130
$766
$896
$2,000

1.8%
3.6%
7.7%
13.1%
34.5%
47.6%
2.4%
7.7%
42.3%
50.0%
100.0%

3.0%
5.5%
7.0%
15.5%
37.7%
53.2%
2.0%
6.5%
38.3%
44.8%
100.0%

1.8%
4.4%
3.6%
9.8%
30.2%
40.0%
0.0%
8.5%
51.5%
60.0%
100.0%

Income Statements
(in millions of dollars)
Net sales
Operating costs
Earnings before interest, taxes, & depr. (EBITDA)
Depreciation
Earnings before interest and taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income before preferred dividends
Preferred dividends
Net Income available to common stockholders

2001
$2,850.0
$2,497.0
$353.0
$90.0
$263.0
$60.0
$203.0
$81.2
$121.8
$4.0
$117.8

2002
$3,000.0
$2,616.2
$383.8
$100.0
$283.8
$88.0
$195.8
$78.3
$117.5
$4.0
$113.5

Common Size Income Statements

2002
2001
2002 Industry
100.0%
100.0%
100.0%
87.6%
87.2%
87.6%
12.4%
12.8%
2.8%
3.2%
3.3%
90.4%
9.2%
9.5%
9.6%
2.1%
2.9%
1.3%
7.1%
6.5%
8.3%
2.8%
2.6%
3.3%
4.3%
3.9%
5.0%
0.1%
0.1%
0.0%
4.1%
3.8%
5.0%

Percent Change Analysis

Balance Sheets
(in millions of dollars)
Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets

2001
$15
$65
$315
$415
$810
$870
$1,680

2002
$10
$0
$375
$615
$1,000
$1,000
$2,000

Liabilities and equity

Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total debt
Preferred stock (400,000 shares)
Common stock (50,000,000 shares)
Retained earnings
Total common equity
Total liabilities and equity

$30
$60
$130
$220
$580
$800
$40
$130
$710
$840
$1,680

$60
$110
$140
$310
$754
$1,064
$40
$130
$766
$896
$2,000

Income Statements
(in millions of dollars)
Net sales
Operating costs
Earnings before interest, taxes, & depr. (EBITDA)
Depreciation
Earnings before interest and taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income before preferred dividends
Preferred dividends
Net Income available to common stockholders

2001
$2,850.0
$2,497.0
$353.0
$90.0
$263.0
$60.0
$203.0
$81.2
$121.8
$4.0
$117.8

2002
$3,000.0
$2,616.2
$383.8
$100.0
$283.8
$88.0
$195.8
$78.3
$117.5
$4.0
$113.5

Percent Change Balance Sheets

Base
2001
2002
0.0%
-33.3%
0.0%
-100.0%
0.0%
19.0%
0.0%
48.2%
0.0%
23.5%
0.0%
14.9%
0.0%
19.0%

0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

100.0%
83.3%
7.7%
40.9%
30.0%
33.0%
0.0%
0.0%
7.9%
6.7%
19.0%

Percent Change Income Statements

Base
2001
2002
0.0%
5.3%
0.0%
4.8%
0.0%
8.7%
0.0%
11.1%
0.0%
7.9%
0.0%
46.7%
0.0%
-3.5%
0.0%
-3.5%
0.0%
-3.5%
0.0%
0.0%
0.0%
-3.7%