Professional Documents
Culture Documents
Financial Statement Analysis Financial Statement Analysis
Financial Statement Analysis Financial Statement Analysis
Financial
Financial Statement
Statement
Analysis
Analysis
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI
1
Financial
Financial
Statement
Statement Analysis
Analysis
Financial Statements
A Possible Framework for Analysis
Ratio Analysis
Trend Analysis
Common-Size and Index Analysis
2
Examples
Examples of
of External
External Uses
Uses
of
of Statement
Statement Analysis
Analysis
Trade 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.
3
Examples
Examples of
of Internal
Internal Uses
Uses
of
of Statement
Statement Analysis
Analysis
Plan -- 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.
4
Primary
Primary Types
Types of
of
Financial
Financial Statements
Statements
Balance Sheet
A summary of a firm’s financial position on
a given date that shows total assets = total
liabilities + owners’ equity.
Income Statement
A summary of a firm’s revenues and
expenses over a specified period, ending
with net income or loss for the period.
5
Basket
Basket Wonders’
Wonders’ Balance
Balance
Sheet
Sheet (Asset
(Asset Side)
Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003a
Cash and C.E. $ 90 a. How the firm stands on
Acct. Rec.c 394 a specific date.
Inventories 696 Prepaid Exp d b. What BW owned.
5 Accum Tax Prepay c. Amounts owed by
10 customers.
Current Assetse d. Future expense items
$1,195 Fixed Assets (@Cost) f
already paid.
1030 Less: Acc. Depr. g
e. Cash/likely convertible
(329) Net Fix. Assets $ 701
to cash within 1 year.
Investment, LT 50 Other
Assets, LT 223 Total
f. Original amount paid.
Assets b $2,169 g. Acc. deductions for
6 wear and tear.
Basket
Basket Wonders’
Wonders’ Balance
Balance
Sheet
Sheet (Liability
(Liability Side)
Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003
Notes Payable $ 290 a. Note, Assets =
Acct. Payablec 94 Liabilities + Equity.
Accrued Taxes d 16 Other b. What BW owed and
Accrued Liab. d 100 ownership position.
Current Liab. e $ 500 c. Owed to suppliers for
Long-Term Debt f 530 goods and services.
Shareholders’ Equity d. Unpaid wages, salaries,
Com. Stock ($1 par) g 200 etc.
Add 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.
7
Total Liab/Equitya,b $2,169 h. Earnings reinvested.
Basket
Basket Wonders’
Wonders’
Income
Income Statement
Statement
Basket Wonders Statement of Earnings (in thousands)
for Year Ending December 31, 2003a
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 $ d. Operating income.
151 Income Taxes e. Cost of borrowed funds.
60 EATg $ 91 f. Taxable income.
Cash Dividends 38 g. Amount earned for
8
Increase in RE $ 53 shareholders.
Framework
Framework for
for
Financial
Financial Analysis
Analysis
Trend / Seasonal Component
How much funding will be
required in the future?
1. Analysis of the funds
needs of the firm. Is there a seasonal
component?
10
Framework
Framework for
for
Financial
Financial Analysis
Analysis
13
Use
Use of
of Financial
Financial Ratios
Ratios
14
External
External Comparisons
Comparisons and
and
Sources
Sources of
of Industry
Industry Ratios
Ratios
This involves Examples:
comparing the ratios Robert Morris
of one firm with those Associates
of similar firms or with
industry averages. Dun & Bradstreet
Almanac of
Similarity is important Business and
as one should Industrial
compare “apples to Financial Ratios
15
apples.”
Liquidity
Liquidity Ratios
Ratios
Balance Sheet Ratios Current
Current Assets
Liquidity Ratios Current Liabilities
2.5
2.3
Ratio Value
2.1
BW
1.9 Industry
1.7
1.5
2001 2002 2003
Analysis Year
21
Acid-Test
Acid-Test Ratio
Ratio --
-- Trend
Trend
Analysis
Analysis Comparison
Comparison
Trend Analysis of Acid-Test Ratio
1.5
1.3
Ratio Value
1.0 BW
Industry
0.8
0.5
2001 2002 2003
Analysis Year
22
Summary
Summary of
of the
the Liquidity
Liquidity
Trend
Trend Analyses
Analyses
The current ratio for BW has been rising
at the same time the acid-test ratio has
been declining.
The 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.
BW
23
Financial
Financial Leverage
Leverage Ratios
Ratios
Balance Sheet Ratios Debt-to-Equity
Total Debt
Financial Leverage Shareholders’ Equity
Ratios The ratio tells us that creditors are
providing 90 cents of financing for
each $1 being provided by
shareholders. Creditors would
generally like this ratio to be low.
Shows the extent to
which the firm is $1,030 = .90
financed by debt. $1,139
24
Financial
Financial Leverage
Leverage
Ratio
Ratio Comparisons
Comparisons
Debt-to-Equity Ratio
Year BW Industry
2003 .90 .90
2002 .88 .90
2001 .81 .89
BW has average debt utilization
25
relative to the industry average.
Financial
Financial Leverage
Leverage Ratios
Ratios
Balance Sheet Ratios Debt-to-Total-Assets
Total Debt
Total Assets
Financial Leverage 47 percent of the firm’s
Ratios assets are financed with
debt and the remaining 53
Shows the percentage percent of the financing
comes from equity
of the firm’s assets
that are supported by $1,030 = .47
debt financing. $2,169
26
Financial
Financial Leverage
Leverage
Ratio
Ratio Comparisons
Comparisons
Debt-to-Total-Asset Ratio
Year BW Industry
2003 .47 .47
2002 .47 .47
2001 .45 .47
BW has average debt utilization
27
relative to the industry average.
Financial
Financial Leverage
Leverage Ratios
Ratios
Balance Sheet Ratios Total Capitalization
(i.e., LT-Debt + Equity)
9.0
Ratio Value
7.0 BW
Industry
5.0
3.0
2001 2002 2003
Analysis Year
32
Summary
Summary of
of the
the Coverage
Coverage
Trend
Trend Analysis
Analysis
The interest coverage ratio for BW has
been falling since 2001. It has been
below industry averages for the past
two years.
This indicates that low earnings (EBIT)
may be a potential problem for BW.
BW
Note, we know that debt levels are in
line with the industry averages.
33
Activity
Activity Ratios
Ratios
Income Statement / Receivable Turnover
(Assume all sales are credit sales.)
Balance Sheet
Ratios Annual Net Credit Sales
Receivables
Activity Ratios The higher the turnover, the shorter the
time between the typical sale and cash
collection
Indicates quality of
receivables and how
successful the firm is in $2,211 = 5.61 times
its collections. $394
34
Activity
Activity Ratios
Ratios
Income Statement / Avg Collection Period
Balance Sheet
Days in the Year
Ratios
Receivable Turnover
This figure tells us the average number
Activity Ratios of days that receivables are outstanding
before being collected
Average number of days
that receivables are
outstanding. 365 = 65 days
(or RT in days) 5.61
35
Activity
Activity
Ratio
Ratio Comparisons
Comparisons
Average Collection Period
Year BW Industry
2003 65.0 65.7
2002 71.1 66.3
2001 83.6 69.2
BW has improved the average collection
36
period to that of the industry average.
Activity
Activity Ratios
Ratios
Income Statement / Payable Turnover (PT)
(Assume annual credit
Balance Sheet purchases = $1,551.)
Ratios
Annual Credit Purchases
Accounts Payable
Activity Ratios The higher the turnover, the shorter the
time between the credit purchase and
cash payment.
Indicates the -promptness of payment to suppliers.
promptness of payment
to suppliers by the firm. $1551
= 16.5 times
$94
37
Activity
Activity Ratios
Ratios
Income Statement / PT in Days
Balance Sheet
Ratios Days in the Year
Payable Turnover
Activity Ratios This figure tells us the average number
of days that payables are yet to be paid
3.5
Ratio Value
3.0 BW
Industry
2.5
2.0
2001 2002 2003
Analysis Year
42
Activity
Activity Ratios
Ratios
Income Statement / Total Asset Turnover
Balance Sheet
Ratios Net Sales
Total Assets
The total asset turnover ratio tells us the
Activity Ratios relative efficiency with which a firm
utilizes its total assets to generate sales.
32.5
30.0 BW
Industry
27.5
25.0
2001 2002 2003
Analysis Year
47
Profitability
Profitability Ratios
Ratios
Income Statement / Net Profit Margin
Balance Sheet
Ratios Net Profit after Taxes
Net Sales
Profitability Ratios measure of the firm’s profitability of
sales after taking account of all
expenses and income taxes.
Indicates the firm’s
profitability after taking $91 = .041
account of all expenses $2,211
and income taxes.
48
Profitability
Profitability
Ratio
Ratio Comparisons
Comparisons
Net Profit Margin
Year BW Industry
2003 4.1% 8.2%
2002 4.9 8.1
2001 9.0 7.6
BW has a poor Net Profit Margin.
49
Net
Net Profit
Profit Margin
Margin --
--
Trend
Trend Analysis
Analysis Comparison
Comparison
Trend Analysis of Net Profit Margin
10
9
Ratio Value (%)
8
7 BW
6 Industry
5
4
2001 2002 2003
Analysis Year
50
Profitability
Profitability Ratios
Ratios
Income Statement / Return on Investment
Balance Sheet
Ratios Net Profit after Taxes
Total Assets
Profitability Ratios This ratio is an indicator of
management’s efficiency in using its
assets to generate profits
Indicates the profitability
on the assets of the firm
(after all expenses and $91 = .042
taxes). $2,160
51
Profitability
Profitability
Ratio
Ratio Comparisons
Comparisons
Return on Investment
Year BW Industry
2003 4.2% 9.8%
2002 5.0 9.1
2001 9.1 10.8
BW has a poor Return on Investment.
52
Return
Return on
on Investment
Investment ––
Trend
Trend Analysis
Analysis Comparison
Comparison
Trend Analysis of Return on Investment
12
Ratio Value (%)
10
8 BW
Industry
6
4
2001 2002 2003
Analysis Year
53
Profitability
Profitability Ratios
Ratios
Income Statement / Return on Equity
Balance Sheet
Ratios Net Profit after Taxes
Shareholders’ Equity
Profitability Ratios
For Basket Wonders
Indicates the profitability December 31, 2003
to the shareholders of the
firm (after all expenses $91 = .08
and taxes). $1,139
54
Profitability
Profitability
Ratio
Ratio Comparisons
Comparisons
Return on Equity
Year BW Industry
2003 8.0% 17.9%
2002 9.4 17.2
2001 16.6 20.4
BW has a poor Return on Equity.
55
Return
Return on
on Equity
Equity --
--
Trend
Trend Analysis
Analysis Comparison
Comparison
Trend Analysis of Return on Equity
21.0
Ratio Value (%)
17.5
14.0 BW
Industry
10.5
7.0
2001 2002 2003
Analysis Year
56
Summary
Summary of
of the
the Profitability
Profitability
Trend
Trend Analyses
Analyses
The 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.
BW
Note, this result is consistent with the low
57
interest coverage ratio.
Summary
Summary of
of Ratio
Ratio Analyses
Analyses
Inventories 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.
58
Common-size
Common-size Analysis
Analysis
An 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.
59
Basket
Basket Wonders’
Wonders’ Common
Common
Size
Size Balance
Balance Sheets
Sheets
60
Basket
Basket Wonders’
Wonders’ Common
Common
Size
Size Balance
Balance Sheets
Sheets
61
Basket
Basket Wonders’
Wonders’ Common
Common
Size
Size Income
Income Statements
Statements
62
Index
Index Analyses
Analyses
64
Basket
Basket Wonders’
Wonders’
Indexed
Indexed Balance
Balance Sheets
Sheets
Regular (thousands of $) Indexed (%)
Liab+Equity 2001 2002 2003 2001 2002 2003
Note Pay 290 295 290 100.0 101.7 100.0
Acct Pay 81 94 94 100.0 116.0 116.0
Accr Tax 13 16 16 100.0 123.1 123.1
Other Accr 15 100 100 100.0 666.7 666.7
Tot CL 399 505 500 100.0 126.6 125.3
LT Debt 150 453 530 100.0 302.0 353.3
Equity 674 1,086 1,139 100.0 161.1 169.0
Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
65
Basket
Basket Wonders’
Wonders’ Indexed
Indexed
Income
Income Statements
Statements
Regular (thousands of $) Indexed (%)
2001 2002 2003 2001 2002 2003
Net Sales 1,235 2,106 2,211 100.0 170.5 179.0
COGS 849 1,501 1,599 100.0 176.8 188.3
Gross Profit 386 605 612 100.0 156.7 158.5
Adm. 180 383 402 100.0 212.8 223.3
EBIT 206 222 210 100.0 107.8 101.9
Int Exp 20 51 59 100.0 255.0 295.0
EBT 186 171 151 100.0 91.9 81.2
EAT 112 103 91 100.0 92.0 81.3
Cash Div 50 50 50 100.0 100.0 100.0
66