FINANCIAL

ANALYSIS PART2
 Financial Leverage Ratios
Balance Sheet Ratios Debt-to-Equity

Total Debt
Financial Leverage Shareholders’ Equity
Ratios
For Basket Wonders
December 31, 2007
Shows the extent to
which the firm is financed $1,030
by debt. = .90
$1,139
 Basket Wonders’ Balance
Sheet (Asset Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a
Cash and C.E. $ 90 a. How the firm stands on
Acct. Rec.c 394 a specific date.
Inventories 696 b. What BW owned.
Prepaid Exp d 5 c. Amounts owed by
Accum Tax Prepay 10 customers.
d. Future expense items
Current Assetse $1,195 already paid.
Fixed Assets (@Cost)f 1030 e. Cash/likely convertible
Less: Acc. Depr. g (329) to cash within 1 year.
Net Fix. Assets $ 701 f. Original amount paid.
Investment, LT 50 Other g. Acc. deductions for
3 Assets, LT 223 Total wear and tear.
b
 Basket Wonders’ Balance
Sheet (Liability Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
Notes Payable $ 290 a. Note, Assets =
Acct. Payablec 94 Liabilities + Equity.
Accrued Taxes d 16 b. What BW owed and
Other Accrued Liab. d 100 ownership position.
Current Liab. e $ c. Owed to suppliers for
500 Long-Term Debt f 530 goods and services.
Shareholders’ Equity d. Unpaid wages,
Com. Stock ($1 par) g 200 Add salaries, etc.
Pd in Capital g 729 e. Debts payable < 1 year.
Retained Earnings h 210 f. Debts payable > 1 year.
Total Equity $1,139 g. Original investment.
4 Total Liab/Equitya,b $2,169 h. Earnings reinvested.
 Basket Wonders’
Income Statement
Basket Wonders Statement of Earnings (in thousands)
for Year Ending December 31, 2007a
Net Sales $ 2,211 a. Measures profitability
Cost of Goods Sold b 1,599 over a time period.
Gross Profit $ 612 b. Received, or receivable,
SG&A Expenses c 402 from customers.
EBITd $ c. Sales comm., adv.,
210 Interest Expensee officers’ salaries, etc.
59 EBT f $ 151 d. Operating income.
Income Taxes 60 e. Cost of borrowed funds.
EATg $ 91 Cash f. Taxable income.
Dividends 38 g. Amount earned for
5
Increase in RE $ 53 shareholders.
 Financial Leverage Ratios
Balance Sheet Ratios Total Capitalization
(i.e., LT-Debt + Equity)

Long-term Debt
Financial Leverage
Total Capitalization
Ratios
For Basket Wonders
Shows the relative December 31, 2007
importance of long-term debt
to the long-term financing of
the firm. $530 = .32
$1,669
 Financial Leverage
Ratio Comparisons
Debt-to-Total-Asset Ratio
Year BW Industry
2007 .47 .47
2006 .47 .47
2005 .45 .47

BW has average debt utilization

relative to the industry average.
 Financial Leverage
Ratio Comparisons
Total Capitalization Ratio
Year BW Industry
2007 .32 .30
2006 .32 .31
2005 .37 .32

BW has average long-term debt utilization

relative to the industry average.
 Coverage Ratios
Income Statement Interest Coverage
Ratios
EBIT
Interest Charges
Coverage Ratios
For Basket Wonders
December 31, 2007
Indicates a firm’s ability
to cover interest
charges. $210 = 3.56
$59
 Coverage
Ratio Comparisons
Interest Coverage Ratio
Year BW Industry
2007 3.56 5.19
2006 4.35 5.02
2005 10.30 4.66

BW has below average interest coverage

relative to the industry average.
 Financial Leverage Ratios
Balance Sheet Ratios Debt-to-Equity

Total Debt
Financial Leverage Shareholders’ Equity
Ratios
For Basket Wonders
December 31, 2007
Shows the extent to
which the firm is financed $1,030
by debt. = .90
$1,139
 Financial Leverage
Ratio Comparisons
Debt-to-Equity Ratio
Year BW Industry
2007 .90 .90
2006 .88 .90
2005 .81 .89

BW has average debt utilization

relative to the industry average.
 Financial Leverage Ratios
Balance Sheet Ratios Debt-to-Total-Assets

Total Debt
Financial Leverage Total Assets
Ratios
For Basket Wonders
December 31, 2007
Shows the percentage of
the firm’s assets that are
supported by debt $1,030 = .47
financing. $2,169
 Coverage Ratio -- Trend
Analysis Comparison
Trend Analysis of Interest Coverage Ratio
11.0

9.0
Ratio Value
7.0 BW
Industry
5.0

3.0
2005 2006 2007
Analysis Year
 Summary of the Coverage
Trend Analysis
 The interest coverage ratio for BW has
been falling since 2005. It has been below
industry averages for the past two years.

• This 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.