Professional Documents
Culture Documents
Chapter 8
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Introduction
Financial statements analysis is the process
of looking beyond the face of the financial statements to gain additional insight into a companys financial health.
the relationship between two items from a companys financial statements for a given period.
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$9,900 450
$128,834 9,450 4,397 2,315 14,864 13,634 593 12,000 5,000 $190,637
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$ 85,300
$ 12,078 $288,015
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45,000 $128,834
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159,181 $288,015
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Elevation Sports, Inc. Income Statement For the Year Ended May 31, 2004
Net sales Cost of goods sold Gross profit Selling expenses $48,334 Administrative expenses 72,189 Total operating expenses Operating income Other revenues and expenses: Interest revenue $ 512 Interest expense (6,000) Total other revenues and expenses Income before income taxes Income taxes Net income Earnings per share
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Profitability Ratios
Profitability is the ease with which a company generates income. Profitability ratios measure a firms past performance and help predict its future profitability level.
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Profitability Ratios
This ratio measures how efficiently the company uses its assets to produce profits.
Profitability Ratios
This ratio measures the percentage of income before income taxes produced by a given level of revenue.
Profit margin before income tax = Net income before taxes Sales
$105,301 $527,146 = 19.98%
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Profitability Ratios
This ratio calculates the amount of sales produced for a given level of assets used. Total asset turnover = Sales Total assets $527,146 $288,015 = 1.83 times
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Profitability Ratios
Return on assets
Profitability Ratios
This ratio measures the amount of after-tax net income generated by a dollar of sales. Profit margin after income tax = Net income after taxes Sales $63,181 $527,146 = 11.98%
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Profitability Ratios
This ratio indicates how much after-tax income was generated for a given level of equity. Return on equity after taxes = Net income after taxes Stockholders equity $63,181 $159,181= 38.69%
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Profitability Ratios
This ratio calculates how much before-tax income was generated for a given level of equity. Return on equity before taxes = (Net income after taxes + Income taxes) Stockholders equity $105,301 $159,181= 66.15%
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Liquidity Ratios
An assets liquidity describes the ease with which it can be converted to cash. Liquidity ratios evaluate a firms ability to generate sufficient cash to meet its short-term obligations.
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Liquidity Ratios
This ratio measures the companys ability to meet its current liabilities with current assets. Current ratio = Current assets Current liabilities $190,637 $83,834 = 2.27 to 1
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Liquidity Ratios
This ratio is a stringent test of liquidity that compares highly liquid current assets to current liabilities.
Liquidity Ratios
This ratio indicates the level of sales generated for a given level of working capital. Net sales to working capital = Sales (Current assets Current liabilities) $527,146 ($190,637 $83,834) = 4.94 times
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Liquidity Ratios
It measures how quickly a company collects its accounts receivable. Accounts receivable turnover = Net credit sales Accounts receivable Net credit sales = $151,650 $2,426 = $149,224
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Liquidity Ratios
Receivable turnover = $149,224 $9,450 = 15.79 times Average collection period = 365 15.79 = 23.27 days
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Liquidity Ratios
This ratio indicates the number of times total merchandise inventory is purchased (or finished goods inventory is produced) and sold during a period. Inventory turnover = Cost of sales Inventory
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Liquidity Ratios
Average number of days Elevation Sports, Inc., holds its inventory = 365 16.41 = 22.24 days
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Solvency Ratios
Solvency is a companys ability to meet the obligations created by its long-term debt. Solvency ratios are of most interest to stockholders, long-term creditors, and company management.
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Solvency Ratios
It measures what proportion of a companys assets is financed by debt. Assets = Liabilities + Owners equity
100% = Some % +
Some %
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Solvency Ratios
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Solvency Ratios
This ratio is also called the times-interest-earned ratio. It indicates a companys ability to make its periodic interest payments.
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Solvency Ratios
Coverage ratio = Earnings before interest expense and income taxes Interest expense ($105,301 + $6,000) $6,000 = 18.55 times
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Learning Objective 3
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Industry Averages
This chapter emphasizes the Almanac of Business and Industrial Financial Ratios. The Almanac includes all companies, public and private. Information provided in the Almanac for each industry is four pages.
Industry Averages
Table I provides an analysis of all companies in the particular industry, regardless of whether they had any net income for the year. Table II provides the same information items as Table I, but it considers only companies that showed a net income for the year.
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Learning Objective 4
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36.6% 20.0% 1.8 12.0% 39.7% 43.5% 2.3 1.7 4.9 15.8 16.4 44.7% 18.6
10.1% 4.2% 1.9 3.4% 19.3% 23.9% 1.6 0.4 7.3 28.6 2.5 65.8% 5.3
16.1% 6.1% 2.3 5.7% 40.5% 43.1% 1.9 0.5 5.9 31.7 2.1 68.2% 6.7
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Company Analysis
Compare ratios to the industry averages. Look for company trends.
Learning Objective 5
Use ratio values from consecutive time periods to evaluate the profitability, liquidity, and solvency of a business.
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2002 137.4 142.5 96.4 147.5 137.9 136.7 91.7 515.8 126.5 0 144.5 94.6 91.7
2001 150.4 141.3 106.4 146.3 145.1 144.2 95.4 69.3 140.3 0 135.3 87.1 81.2
2000 153.7 150.1 102.4 155.4 158.3 156.8 84.0 131.4 147.7 0 129.0 99.2 98.7
1996 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 0 100.0 100.0 100.0
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Learning Objective 6
Draw Conclusions
The evaluation process by nature depends upon individual perception. 1. Family Dollar Stores, Inc., is an industry leader in profitability and solvency. 2. Family Dollar has improved the distribution element of its supply chain.
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Draw Conclusions
3. Part of the company profitability and liquidity will depend upon its increasing the inventory turnover ratio. 4. If we choose to invest in a general merchandise discounter, Family Dollar Stores, Inc., might be one to consider.
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Learning Objective 7
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End of Chapter 8
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