General Income Statement

• Sales
• Cost of Goods Sold
• Gross Profit
• Other expenses (corporate overhead,
advertising, marketing, jets, consultants)
• Operating Income
• Taxes
• Net Profit
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 Financial Statement Analysis
(From Bruce Behn, Dept of Accounting)
Four Classes of Financial Ratios
1. Liquidity - measures the firm’s ability to meet its maturing
short-term obligations as they come due.
2a. Leverage - measures the extent to which the firm has been
financed by debt.
2b. Coverage -relates the financial charges of the firm to its
ability to service these charges.
3. Activity - measures how effectively the firm is using its
assets.
4a. Profitability -measures management’s overall effectiveness
as shown by the returns generated on sales and investments.
4b. Investor Returns - measures return to investor’s
investment.

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Profitability: What sort of returns is the firm
having?
ROA Net Profit
1999 3% 2%
2008 6% 6%
Industry Compare % %
S&P 500 (9/02) 6.1% 10.5%
Rule of Thumb 5.3% 3
Liquidity: Can the company meet its short term
obligations (bank short term loans)?

Quick Current
1999 0.57 1.54
2008 0.73 2.00
Others in Industry
S&P 500 (9/02) 1.1 1.62
Banker rule of
thumb 1 or higher 2 or higher
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 Visual: Quick Ratio
• .73

Short term bank debt

Cash Bills to pay to
suppliers
Accounts
Credit card bills
Receivable

5
 Visual: Current Ratio

• 2

Inventory

Short term bank debt

Cash Bills to pay to
suppliers
Accounts
Credit card bills
Receivable
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Leverage: How are assets financed?
Times
Debt/ Interest
assets Earned
1999 .48 8X
2008 .58 11X
Others in Industry x
S&P 500 (9/02) .50 9.6x
Rule of Thumb .50 10x
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 Visual: Debt to Assets
• .6
DEBT:
ASSETS Short term debt +
Long term debt

EQUITY
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 Visual: Debt to Equity
• 1

DEBT:
ASSETS Short term debt +
Long term debt

EQUITY
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 Activity:
How is company being managed?
Days’
Inventory Receiv-
Turns able
1999 2.56x 64 days
2008 1.95x 82 days
Others in Industry x days
S&P 500 (9/02) 11.05x 38 days
Rule of Thumb (mfg) 12x/year Terms given
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Inventory Turns: what type of inventory?

• 12x a year
Every month, bins are
Raw Materials empty then filled up
again

Work In
Progress Every month,
warehouse shelves
are emptied of
Finished Goods finished products,
shelves wiped, then
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refilled.
Market: How are equity markets responding to
this stock?

Price of Stock/
Earnings per share
1999 14
2008 4
Others in Industry
S&P 500 (9/02) 25
Rule of Thumb
(2000: 40-50!) Historically 15-20
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 Hypothetical example….

• A company makes $50 million in net profits.

• It has 10 million shares outstanding.
• So, we compute its earnings per share (EPS) to
be $5.
• We then check on Yahoo and find that the
stock is trading at $100 per share.
• So, we compute the PE ratio:
• PRICE/EARNING RATIO IS: $100/$5 = 20
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Contribution by Division: Gross Margins

Water Solutions

1999 20% 25%

2003 19% 27%

2008 19% 25%

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By Division: Percent of sales

Water Solutions

1999 83% 17%

2003 70% 30%

2008 44% 56%

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