CH 04 - Slides Updated

Chapter 4
Using Financial Statements for

Investing and
Credit Decisions
© Cambridge Business Publishers

Takeaway 1
Use trend analysis and
common-size statements
to analyze financial statements.

Fundamentals Financial Analysis
 Financial performance decisions: many tools used by analysts

 What is a Trend analysis ? How is trend analysis used to evaluate
the financial health of an organization?
 Trend Analysis on the Income Statement: revenue, operating income, net
income
 Trend Analysis on the Balance sheet: asset, PPE, debt, SHE/A
 Trend Analysis on the Statement of Cash Flow: Primary source of cash for
the period should be from operating cash flow
 Common size financial statements
 Compare Different size firms or
 Performance of the same firm that changes size over time
© Cambridge Business Publishers 3

Avis Budget Group: Income Statement Trends
Av is Bud g e t G ro up , Inc . (in
Ye a r End ing De c . 3 1
$ m illio ns)
C o nso lid a te d Sta te m e nts o f

Ye a r 2 Ye a r 1 c ha ng e %
O p e ra tio ns
Re v e nue s $ 5 ,1 3 1 $ 5 ,9 8 4 ($853) -14%
Ex p e nse s
De p re c ia t io n a n d le a se c h a rg e s, n e t 1 ,5 2 1 1 ,7 8 5 ($264) -15%
Se llin g , g e n e ra l a n d a d m in ist ra t iv e 551 655 ($104) -16%
o t h e r o p e ra t in g e xp e n se s 2 ,6 3 6 3 ,1 4 7 ($511) -16%
To ta l o p e ra ting e x p e nse s 4 ,7 0 8 5 ,5 8 7 ($879) -16%
In t e re st e xp e n se 447 450 ($3) -1%
Re st ru c t u rin g c h a rg e s 20 28 ($8) -29%
Im p a irm e n t 33 1 ,2 6 2 ($1,229) -97%
To ta l e x p e nse s 5 ,2 0 8 7 ,3 2 7 ($2,119) -29%

Lo ss b e fo re in c o m e t a xe s -7 7 -1 ,3 4 3 $1,266 -94%
Be n e fit fro m in c o m e t a xe s -3 0 -2 1 9 $189 -86%
Ne t inc o m e (lo ss) ($ 4 7 ) ($ 1 ,1 2 4 ) $1,077 -96%
Trend Analysis
Operating revenues and expenses decreased proportionately, while one-time charges
decreased significantly causing a decrease in net loss.
Avis Budget Group: balance sheet Trends
C o nso lid a te d
Ye a r 2 Ye a r 1 c ha ng e
b a la nc e she e t
Asse ts De c e m b e r 3 1
C u rre n t A sse t s Ye a r 2 Ye a r 1
C a sh A n d
C a sh
Eq u iv a le n t s $482 $258 $224 87%
Ne t
Re c e iv a b le s 290 360 ($70) -19%
O t h e r C u rre n t
A sse t s 958 455 $503 111%
To t a l C u rre n t A sse t s 1 ,7 3 0 1 ,0 7 3 $657 61%
Lo n g Te rm In v e st m e n t s 398 650 ($252) -39%
Pro p e rt y Pla n t a n d Eq u ip m e n t 6 ,4 0 9 7 ,6 4 9 ($1,240) -16%
In t a n g ib le A sse t s 554 542 $12 2%
O t h e r A sse t s 1 ,0 0 2 1 ,4 0 4 ($402) -29%
To ta l Asse ts $ 1 0 ,0 9 3 $ 1 1 ,3 1 8 ($1,225) -11%
Lia b ilitie s $0
C u rre n t Lia b ilit ie s $0
Ac c o u n ts
Pa y a b le $ 1 ,2 7 2 $901 $371 41%
Sh o rt / C u rre n t
Lo n g Te rm
De b t 12 10 $2 20%
To t a l C u rre n t Lia b ilit ie s 1 ,2 8 4 911 $373 41%
Lo n g Te rm De b t 2 ,8 3 3 2 ,6 7 1 $162 6%
O t h e r Lia b ilit ie s 5 ,7 5 4 7 ,6 4 3 ($1,889) -25%
To ta l Lia b ilitie s 9 ,8 7 1 1 1 ,2 2 5 ($1,354) -12%
Sto c k ho ld e rs' Eq uity $0
C o m m o n St o c k 9 ,0 9 9 9 ,1 9 8 ($99) -1%
Re t a in e d Ea rn in g s -2 ,6 9 1 -2 ,6 4 4 ($47) 2%
Tre a su ry St o c k -6 ,1 4 9 -6 ,2 6 7 $118 -2%
O t h e r St o c kh o ld e rs’ Eq u it y -3 7 -1 9 4 $157 -81%
To ta l Sto c kho ld e rs’ Eq uity 222 93 $129 139%
To t a l lia b ilit ie s & St o c kh o ld e rs' © Cambridge
$ 1 0 ,0 9 3 Business ($1,225)
Publishers
$ 1 1 ,3 1 8 -11% 5
Avis Budget Group: Cash flow statement Trends
Av is Bud g e t G ro up , Inc . Ye a r End ing De c . 3 1
C o nso lid a te d Sta te m e nts o f C a sh Flo w s Ye a r 2 Ye a r 1 c ha ng e %
C a sh Flo w s Fro m O p e ra ting Ac tiv itie s
Ne t In c o m e ($ 4 7 ) ($ 1 ,1 2 4 ) $1,077 -96%
De p re c ia t io n 1 ,4 8 7 1 ,7 2 7 ($240) -14%
A d ju st m e n t s To Ne t In c o m e -2 7 1 ,0 2 1 ($1,048) -103%
C h a n g e s In A c c o u n t s Re c e iv a b le s 52 50 $2 4%
C h a n g e s In Lia b ilit ie s -9 -3 3 $24 -73%
C h a n g e s In O t h e r O p e ra t in g
A c t iv it ie s 35 63 ($28) -44%
N e t C a sh Flo w fro m O p e ra t in g A c t iv it ie s 1 ,4 9 1 1 ,7 0 4 ($213) -13%
C a sh Flo w s Fro m Inv e sting Ac tiv itie s
C a p it a l Exp e n d it u re s -6 ,8 1 4 -8 ,6 9 1 $1,877 -22%
O t h e r C a sh flo w s fro m In v e st in g A c t iv it ie s 6 ,9 8 0 6 ,5 9 5 $385 6%

N e t C a sh Flo w s Fro m (fo r) In v e st in g
A c t iv it ie s 166 - 2 ,0 9 6 $2,262 -108%
C a sh Flo w s Fro m Fina nc ing Ac tiv itie s
Sa le / Pu rc h a se o f St o c k 0 -3 3 $33
Ne t Bo rro w in g s -1 ,3 9 3 558 ($1,951) -350%
O t h e r C a sh Flo w s fro m Fin a n c in g A c t iv it ie s -7 2 -6 2 ($10) 16%

N e t C a sh Flo w s fro m (fo r) Fin a n c in g
A c t iv it ie s - 1 ,4 6 5 463 ($1,928) -416%
Effe c t O f Exc h a n g e Ra t e C h a n g e s 32 -2 7 $59 -219%
C h a n g e In C a sh a n d C a sh Eq u iv a le n t s $224 $44 $180 409%

Common-Size Financial Statements
 A widely used technique for analyzing financial performance

 Allows the financial statement user to readily compare
 Different size firms or
 Performance of the same firm that changes size over time
 All income statement items are expressed as a percentage of net

revenues
 All balance sheet items are expressed as a percentage of total
assets

Common-Size data
Avis Budget Group
Year Ending Dec.
Avis Budget Group, Inc.
31
Consolidated Statements of
Year 2 Year 1
Operations
Revenues 100.0% 100.0%
Expenses:
other Operating expenses 51.4% 52.6%
Depreciation and lease charges,
29.7% 29.8%
net
Selling, general and
10.7% 10.9%
administrative
Interest expense 8.7% 7.5%
0.4%
Restructuring charges 0.5%
Goodwill impairment 0.6% 21.1%
Total expenses 101.5% 122.4%
Loss before income taxes -1.5% -22.4%
Benefit from income taxes 0.6% 3.6%
Net income (loss) -0.9% -18.8%
SGA expense declined, but the non-recurring items

caused the most impact
on the change in net loss for the year.
Takeaway 2
Analyze financial statements to
evaluate company profitability, asset
management, and
financial risk.

Key Ratios and Limitations
of Financial Analysis
 A review and calculation of select key financial analysis ratios

 Profitability
 Asset management
 Liquidity
 Solvency

Key Financial Ratios
 Ratios have no absolute “required” definition

 Variations often based on personal preference
 Key issue is to use consistent components
 Enhance comparability
 Global application of ratios

 Executed exactly the same worldwide
 Some ratios are not relevant in all countries
 Such as countries without credit systems

How Well is Goliath Company Doing?
December 31 Year 2 Year 1
Assets
Current Assets
Cash and cash equivalents $14,778 $9,983
Short term investments 33,310 34,643
Net receivables 9,729 6,387
Inventory 505 35
Other current assets 2,132 1,710
Total Current Assets 60,454 52,758
Long term investments 1,469 790
Property, plant and equipment 11,854 9,603
Intangible assets 18,010 8,924
Other long term assets 2,011 499
Total Assets $93,798 $72,574
Liabilities
Current Liabilities
Accounts payable $ 10,893 $7,148
Current portion of long-term debt 2,549 1,218
Other current liabilities 895 547
Total Current Liabilities 14,337 8,913
Long-term debt 2,988 2,986
Other long-term liabilities 4,758 2,530
Total Liabilities 22,083 14,429
Stockholders' Equity
Common stock 23,373 20,540
Retained earnings 48,342 37,605
Total Stockholders' Equity 71,715 58,145
Total Liabilities & Stockholders' Equity $93,798 $72,574

How Well is Goliath Company Doing?
Statement of income Cashflow Statement

Years Ending December 31 Year 2 Year 1 Years Ending December 31 Year 2 Year 1
Total Revenue $50.175 $37,905 Operating Activities
Cost of Revenue 20,634 13,188 Net Income $ 10,737 $ 9,737
Gross Profit 29,541 24,717 Adjustments To Net Income 5,882 4,828
Operating Expenses Net Cash Flow From Operating Activities 16,619 14,565
Research Development 6,793 5,162 Investing Activities
Selling General and Administrative 9,988 7,813
Capital Expenditures (3,273) (3,438)
Total Operating Expenses 16,781 12,975
Investments 785 (13,703)
Income from Continuing Operations 12,760 11,742
Other Cash flows from Investing Activities (10,568) (1,900)
Total Other Income /(Expense) 710 642
Net Cash Flow From Investing Activities (13,056) (19,041)
Earnings Before Interest and Taxes 13,470 12,384
Financing Activities
Interest Expense 84 58
Income Before Tax 13,386 12,326 Net borrowings 1,328 726
Income Tax Expense 2,598 2,589 Other Cash Flows from Financing Activities (99) 81
Income from continuing operations 10,788 9,737 Net Cash Flow From Financing Activities 1,229 807
Discontinued operation (51) Effect of Exchange Rate Changes 3 22
Net Income $10,737 $9,737 Change In Cash and Cash Equivalents $ 4,795 $(3,647)

Analyzing Profitability
 Refers to how much income was generated by a business

 Particularly relative to the amount of total assets invested
 Key ratios
 Return on shareholders’ equity (ROE)
 Return on assets (ROA)
 Return on sales (ROS)
 Gross profit margin ratio

Profitability Analysis
Return on Shareholders’ Equity
Return on Net income – Preferred stock dividends
shareholders’ = Shareholders’ equity
equity
 Indicates the rate of return generated by a business for its

common shareholders.
$10,737 – $0
Year 2 = = 15.0%
$71,715
$9,737 – $0
Year 1 = = 16.7%
$58,145
Goliath generated a decrease in its return on equity, an unfavorable change.

Return on Assets
Return on Net income + Interest expense (1 – Tax rate)

= Total assets
assets
 Indicates the rate of return generated on a company’s investment

in assets from all sources.
$10,737 + $84(1 – 0.190*)
Year 2 = = 11.5%
$93,798
$19,737 + $58(1 – 0.210*)
Year 1 = = 13.5%
$72,574
*year 2 tax rate = $2,598/$13,689= 19.0%
year 1 tax rate = $2,589/$12,326 = 21.0%
Goliath generated 11.5 cents of profit for every dollar invested in assets in Year 2, an
unfavorable change from Year 1.
Return on Sales
Net income
Return on sales = Net sales
 Indicates the percentage of net income remaining from a dollar of

sales after subtracting all expenses.
$10,737
Year 2 = = 21.4%
$50,175
$9,737
Year 1 = = 25.7%
$37,905
Goliath Company generated 21.4 cents of profit per dollar of sales

in Year 2, compared to 25.7 cents in Year 1.

Gross Profit Margin Ratio
Gross profit Net sales – Cost of goods sold

= Net sales
margin ratio
 Indicates the percentage of income generated from sales after

deducting the cost of goods sold.
$50,175 – $20,634
Year 2 = = 58.9%
$50,175
$37,905 – $13,188
Year 1 = = 65.2%
$37,905
Goliath generated 58.9 cents of gross profits from each sales dollar in Year 2, compared to 65.2
cents in Year 1.

Analysis of Asset Management
 Refers to how well management uses a company’s assets to

generate profits
 Common ratios used to calculate
 Receivable turnover
 Receivable collection period
 Inventory turnover
 Inventory-on-hand period
 Asset turnover
 Desired effects
 Collect receivables as quickly as possible
 Sell inventory as quickly as possible
 Generate large amounts of sales using assets

Asset Management
Receivable Turnover and Receivable Collection Period
Net sales
Receivable turnover = Accounts receivable
 The number of times receivables are converted to cash during a certain time period.
$50,175
Year 2 = $9,729 = 5.16 times Goliath’s sales/collection cycles numbered
$37,905 5.16 in Year 2, down from 5.94
Year 1 = $6,387 = 5.94 times times in Year 1.
Receivable collection 365

period = Net sales / Accounts receivable
 Number of days required, on average, to collect an outstanding account receivable.
365
Year 2 = $50,175 / $9,729 = 70.8 days Goliath required 70.8 days, on average, to
collect an outstanding receivable in Year 20
365 2; an unfavorable increase from 61.5 in
Year 1 = $37,905 / $6,387 = 61.5 days
Year 1.
Asset Management
Inventory Turnover and inventory on hand period
Cost of goods sold

Inventory turnover = Inventory
 How many times a company renewed its inventory in a given period.
20,634 Goliath’s inventory turnover numbered

Year 2 = $505 = 40.9 times
40.9 in Year 2, down from 376.8 times in
13,188 Year 1. These numbers are not really
Year 1 = $35 = 376.8 times particularly relevant since the level of
inventory is so small.
Inventory-on-Hand 365
= Cost of goods sold / Inventory
period
 Number of days, on average, required to sell the inventory
Goliath required 8.9 days on average to sell its

365
Year 2 = = 8.9 days inventory in Year 2,
$20,634 / $505
an unfavorable increase from 1.0 days from
365 Year 1, however these numbers are not so
Year 1 = $13,188 / $35 = 1.0 days relevant as the level of inventory is so small.
21
Asset Management
Asset Turnover
Net sales
Asset turnover = Total assets
 The amount of sales generated from each dollar invested in assets.
$50,175
Year 2 = = 0.54
$93,798
$37,905
Year 1 = = 0.52
$72,574
Every dollar invested in Goliath’s assets generated $0.54 of sales revenue during Year 2, up
from $0.52 in Year 1.

Analysis of Liquidity
 Refers to the amount of liquid resources available to pay current

obligations as they come due
 Common liquidity measures
 Cash and marketable securities to total assets
 Quick ratio
 Current ratio
 Accounts payable turnover
 Days’ payable period
 Goal is to maintain an adequate but not

excessive liquidity

Liquidity―Cash and
Marketable Securities to Total Assets
Cash and marketable Cash + Marketable securities

securities to total assets = Total assets
 Percentage of total assets held as highly liquid assets.
$14,778 + $33,310
Year 2 = = 0.51
$93,798
$9,983 + $34,643
Year 1 = = 0.62
$75,574
About half of Goliath’s assets are highly liquid at the end of Year 2,
down from 62% at the end of Year 1.

Liquidity
Quick Ratio
Quick ratio Cash + Marketable securities + Accounts receivable

= Current liabilities
 Amount of liquid assets available to pay short-term liabilities.
$14,778 + $33,310 + $9,729

Year 2 = = 4.0
$14,337
$9,983 + $34,643 + $6,387
Year 1 = = 5.7
$8,913
Goliath’s liquid assets are 4.0 times as large its current obligations
at the end of Year 2, down from 5.7 at the end of Year 1,
indicating lower, but still high liquidity.

Liquidity
Current Ratio
Current assets
Current ratio = Current liabilities
 The amount of current assets available to service current

liabilities.
$60,454
Year 2 = = 4.2
$14,337
$52,758
Year 1 = = 5.9
$8,913
Goliath’s current assets are 4.2 times as large as its current obligations
at the end of Year 2, down from 5.9 at the end of Year 1, indicating lower,
but still high liquidity.

Credit Risk Analysis
Solvency
 What are creditors concerned about?

 Default risk
 The risk of not getting paid interest and principal
 Solvency ratios
1. Long-term debt to total assets
2. Long-term debt to shareholders’ equity
3. Interest coverage ratio

Solvency
Long-Term Debt to Total Assets Ratio
Long-term Long-term debt + Current portion of LT debt
debt to total = Total Assets
assets ratio
 Percentage of a corporation's assets financed with long-term debt.
$2,988 + $2,549
Year 2 = = 5.9%
$93,798
$2,986 + $1,218
Year 1 = = 5.8%
$72,574
Goliath financed 5.9% of its assets with debt as of the end of Year 2,
up slightly from 5.8% at the end of Year 1,
but still a very low debt financing amount.

Solvency
Long-Term Debt to Shareholders’ Equity
LT debt to Long-term debt + Current portion of LT debt
shareholders’e = Shareholders’ equity
quity ratio
 Relative investment of long-term creditors vs. shareholders in a business
$2,988 + $2,549
Year 2 = = 7.7% Goliath’s debt-to-equity ratio is 7.7% in
$71,715
Year 2, up slightly from 7.2% in Year
$2,986 + $1,218 1, but still very low.
Year 1 = = 7.2%
$58,145
Recalculating the ratio over several time periods can reveal trends in a company's choice to
finance assets with debt instead of equity and its ability to repay its debt over time.

Solvency
Interest Coverage Ratio
Interest Net income before taxes + Interest expense
coverage ratio= Interest expense
 Extent to which current operating income covers current debt service charges.
$13,386 + $84
Year 2 = = 160.4
$84
$12,326 + $58
Year 1 = = 213.5
$58
Goliath had relatively no interest expense in Year 2 or Year 1, so this ratio

is not really relevant.

Takeaway 3
Explain the return on equity model of
financial analysis.
Dupont analysis decomposition of ROE

ROE Model Framework
 Dupont analysis
 Used to evaluate a firm’s overall enterprise performance
 Shows that a business can increase its overall performance by
increasing any of the following ratios:
Return on Equity
(ROE)
Return on Sales Financial Leverage

Asset Turnover (AT)
(ROS) (LEV)

ROE Analysis
Goliath, Inc.
Goliath, Inc. Year 2 Year 1
Total revenues $50,175 $37,905
Net income 10,737 9,737
Total assets 93,798 72,574
Shareholders' equity 71,715 58,145
ROE Analysis
ROE = Net income ÷ Shareholders' Equity 15.0%* 16.7%
ROS = Net income ÷ net sales 21.4% 25.7%
AT = Net sales ÷ Total Assets 0.54 0.52
LEV = Total Assets ÷ Shareholders' Equity 1.31 1.25
The decrease in ROE was due to a decrease in ROS,

to 21.4% in Year 2, down from 25.7% in Year 1.

Sustainable Growth Rate (SGR)
 What is sustainable growth?

 A firm’s rate of return on shareholders’ equity available to be reinvested in
the business
 Calculated as: ROE x (1- dividends payout)
Return Asset Financial Dividend

× × ×
on Sales Turnover Leverage Retention Rate
 Goliath, Inc.’s SGR:

Year 2 = 21.4% × 0.54 × 1.31 × 100% = 15.1%*
Year 1 = 25.7% × 0.52 × 1.25 × 100% = 16.7%* * Difference due to rounding
the rate at which the company can grow while using its own internal revenue
without borrowing from outside sources
Unlevering Financial Ratios
• ROE =
Can also be expressed as:
- ROA = return generated by total investments in assets financed by equity and

borrowings
- “Unlever” the ROA ratio = add the current-period interest expense paid to creditors
back to the business’s net income
- Yielding a measure of net income before any return distributed to either debtholder or
shareholders
- This will increase cost of equity
- Unlevered ROA =
- Unlevered ROS =

Unlevering adjustment made to the ROS ratio:

Unlevering ROS facilitates a reformulation of the ROE model:
CSOE Represents the portion of a

company’s operating earnings
allocable to the common
shareholders.

Takeaway 4
Recognize the limitations of financial
statement analysis.

Financial Statement Analysis Limitations
 Measurement concerns
 Market value can be subjective
 Historical cost is reliable, but not current
 Incomplete data and complex accounting standards

 Some assets and liability values are omitted from the balance sheet due to
conservatism, such as
 Trained workforces
 Management talent
 Brand recognition
 Flexibility in choosing accounting methods
 Off balance sheet liabilities: operating leases
 Investors must exercise due diligence

Takeaway 5
Construct pro forma
financial statements to evaluate
a company’s ability to generate
future earnings and cash flows.

Pro Forma Financial Statements
 Also known as forecasted financial statements

 Prepared on an ‘as if’ basis using assumptions of what might
happen in the future
 Helpful to users who are interested in how a firm might perform
in the future under various economic scenarios

Takeaway 6
Understand a common approach to
calculating the cost of equity
financing.

Calculating the Cost
of Equity Financing
How can we calculate the unexpected cost of equity financing
for a company?
 Cost of equity financing—rate of return expected by shareholders.
 Capital Assets Pricing Model (CAPM):
re = Cost of equity financing.
rf = Risk-free rate of return, often proxied by the current yield to maturity of the U.S.
ten-year Treasury bond
β = Measure of the systematic risk of a business, proxied by a firm’s equity beta
(available from any financial internet website)
rm = Market rate of return for a diversified portfolio of equity securities, often proxied
by the rate of return on the Standard & Poor’s 500 Index

Q1
1. Which of the following would most likely help an investor determine

how effectively a company utilizes its borrowed funds?
A. A comparison of the company’s ROE with its ROA.
B. A comparison of how quickly a company collects amounts owed to it by
its customers.
C. A liquidity analysis.
D. An analysis of the company’s asset management.

Q1 answer
1. Which of the following would most likely help an investor determine

how effectively a company utilizes its borrowed funds?
A. A comparison of the company’s ROE with its ROA.
B. A comparison of how quickly a company collects amounts owed to it by
its customers.
C. A liquidity analysis.
D. An analysis of the company’s asset management.
 Answer: A
ROE =ROA x FL

Q2
1. The Gardeners’ Store Co. reported an ROE of 9.2% and a ROA of

5.0% for the year. Which statement is true concerning The Gardeners’
Store Co.?
A. It generated more operating income than cash flows during the year.
B. It effectively utilized financial leverage.
C. It distributed 9.2% of its profits as dividends to its investors.
D. Its debt is equal to 4.2% of total assets.

Q2
1. The Gardeners’ Store Co. reported an ROE of 9.2% and a ROA of

5.0% for the year. Which statement is true concerning The Gardeners’
Store Co.?
A. It generated more operating income than cash flows during the year.
B. It effectively utilized financial leverage.
C. It distributed 9.2% of its profits as dividends to its investors.
D. Its debt is equal to 4.2% of total assets.
 Answer: B

Q3
 Presented below is information from Plant Company, Inc.:

 During Year 2, Plant Company, Inc. paid preferred dividends totaling $1,728
million. How much is the rate of return Plant Company, Inc. generated during
Year 2 for its common shareholders?
A. 45.8% (In millions) Year 2 Year 1
B. 6.7% Balance sheet
C. 12.2% Total assets $41,172 $32,754
D. 34.4% Shareholders' equity 7,565 7,878
Income statement
Net sales $42,464 $35,034
Net income 4,330 3,930

Q3 answer
 Presented below is information from Plant Company, Inc.:

 During Year 2, Plant Company, Inc. paid preferred dividends totaling $1,728
million. How much is the rate of return Plant Company, Inc. generated during
Year 2 for its common shareholders?
A. 45.8% (In millions) Year 2 Year 1
B. 6.7% Balance sheet
C. 12.2% Total assets $41,172 $32,754
D. 34.4% Shareholders' equity 7,565 7,878
Income statement
Net sales $42,464 $35,034
Net income 4,330 3,930
Answer: D. Rationale: ROE = [$4,330 – $1,728] / $7,565 = 34.4%

P4.28
1. From 2015 to 2019, sales grew by 11.3%, but net income only grew by 3.5% This
implied that expenses grew at a faster rate than revenues
2. Financial leverage = Total assets  Shareholders’ equity it increased from 2.43 (2015)
to 3.74 (2019). Apple is More financed by debt in 2019 compared to 2015 (high
leveraged). Notice that interest rates were historically low during that period. It is likely
Apple was taking advantage of it outstanding credit worthiness.
3. Asset Turnover = Net sales  Total assets (calculate the ratio for the period).data
suggests that the company’s asset turnover decreased from 2015 to 2019. In 2015,
every dollar of assets was generating $0.80 of sales. By 2019, each dollar of assets
was only generating $0.77 of sales (although asset turnover in 2019 was improved from
2017).
4. The company appears justified in declaring its dividend.
 Net income 55 billion in 2019.
 Cash Apple’s cash and marketable securities have grown consistently over the five-year
period balance $100B

CH 04 - Slides Updated

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 04 - Slides Updated

Uploaded by

Copyright:

Available Formats

Chapter 4

Using Financial Statements for

© Cambridge Business Publishers

© Cambridge Business Publishers

 Financial performance decisions: many tools used by analysts

© Cambridge Business Publishers 3

C o nso lid a te d Sta te m e nts o f

To ta l e x p e nse s 5 ,2 0 8 7 ,3 2 7 ($2,119) -29%

O t h e r C a sh flo w s fro m In v e st in g A c t iv it ie s 6 ,9 8 0 6 ,5 9 5 $385 6%

O t h e r C a sh Flo w s fro m Fin a n c in g A c t iv it ie s -7 2 -6 2 ($10) 16%

© Cambridge Business Publishers 6

 A widely used technique for analyzing financial performance

 All income statement items are expressed as a percentage of net

© Cambridge Business Publishers 7

SGA expense declined, but the non-recurring items

© Cambridge Business Publishers

 A review and calculation of select key financial analysis ratios

© Cambridge Business Publishers 10

 Ratios have no absolute “required” definition

 Global application of ratios

© Cambridge Business Publishers 11

Total Liabilities & Stockholders' Equity $93,798 $72,574

© Cambridge Business Publishers 12

Statement of income Cashflow Statement

© Cambridge Business Publishers 13

 Refers to how much income was generated by a business

© Cambridge Business Publishers 14

 Indicates the rate of return generated by a business for its

Goliath generated a decrease in its return on equity, an unfavorable change.

© Cambridge Business Publishers 15

Return on Net income + Interest expense (1 – Tax rate)

 Indicates the rate of return generated on a company’s investment

 Indicates the percentage of net income remaining from a dollar of

Goliath Company generated 21.4 cents of profit per dollar of sales

© Cambridge Business Publishers 17

Gross profit Net sales – Cost of goods sold

 Indicates the percentage of income generated from sales after

© Cambridge Business Publishers 18

 Refers to how well management uses a company’s assets to

© Cambridge Business Publishers 19

Receivable collection 365

Cost of goods sold

20,634 Goliath’s inventory turnover numbered

Goliath required 8.9 days on average to sell its

 The amount of sales generated from each dollar invested in assets.

© Cambridge Business Publishers 22

 Refers to the amount of liquid resources available to pay current

 Goal is to maintain an adequate but not

© Cambridge Business Publishers 23

Cash and marketable Cash + Marketable securities

 Percentage of total assets held as highly liquid assets.

© Cambridge Business Publishers 24

Quick ratio Cash + Marketable securities + Accounts receivable

 Amount of liquid assets available to pay short-term liabilities.

$14,778 + $33,310 + $9,729

© Cambridge Business Publishers 25

 The amount of current assets available to service current

© Cambridge Business Publishers 26

 What are creditors concerned about?

© Cambridge Business Publishers 27

 Percentage of a corporation's assets financed with long-term debt.

© Cambridge Business Publishers 28

 Relative investment of long-term creditors vs. shareholders in a business