CHAPTER 4 Analysis of Financial Statements 2 . 9 enter Balance Sheet: 2012 Cash Accounts Receivable Inventories !

otal Current Assets 1,"26,802 #ross $i%e& Assets 1,202,"50 'ess: (e)reciation *et $i%e& Assets !otal Assets 2,866,5"2 85,632 878,000 1,716, 80 2,680,112 1,1"7,160 380,120 817,0 0 3, "7,152 263,160 "3",7"0 Assets 2011 7,282 632,160 1,287,360
nd

Liabilities & Equity 2012 Accts )a+able *otes )a+able Accruals !otal C' 'on,-ter. &ebt Co..on stoc/ Retaine& earnin,s !otal 01uit+ !otal ' 2 0 36,800 300,000 08,000 1,1 ,800 00,000 1,721,176 231,176 1,"52,352 3, "7,152 2011 52 ,160 636,808 8",600 1,650,568 723, 32 60,000 32,5"2 "2,5"2 2,866,5"2

ncome statement 2012 Sales C3#S 3ther e%)enses 0BI!(A (e)r6 2 A.ort6 0BI! Interest 0%)6 136,012 0B! !a%es *et inco.e 3ther &ata *o6 o7 shares 08S (8S Stoc/ )rice 'ease ).ts 250,000 1601 06220 12617 0,000 100,000 -16612 06110 2625 0,000 7,035,600 5,875,""2 550,000 60",608 116,"60 "2,6 8 70,008 22,6 0 16",056 253,58 2011 6,03 ,000 5,528,000 51","88 413,"885 116,"60 4130," 85 4266,"605 4106,78 5 4160,1765

9h+ are ratios use7ul:

Ratios stan&ar&i;e nu.bers an& 7acilitate co.)arisons6 Ratios are use& to hi,hli,ht <ea/nesses an& stren,ths6

9hat are the 7ive .a=or cate,ories o7 ratios, an& <hat 1uestions &o the+ ans<er: 'i1ui&it+: Can <e .a/e re1uire& )a+.ents: Asset .ana,e.ent: ri,ht a.ount o7 assets vs6 sales: (ebt .ana,e.ent: Ri,ht .i% o7 &ebt an& e1uit+: 8ro7itabilit+: (o sales )rices e%cee& unit costs, an& are sales hi,h enou,h as re7lecte& in 8>, R30, an& R3A: >ar/et value: (o investors li/e <hat the+ see as re7lecte& in 8?0 an& >?B ratios:

Liquidity Ratios Calculate !"Leon"s cu##ent #atio fo# 20126

2012

Current ratio @ Current assets ? Current liabilities @ A2,680 ? A1,1 5 @ 263 In&ustr+ Current Ratio @ 267 B Asset Management Ratios $%at is t%e in&ento#y tu#no&e# &s' t%e in(ust#y a&e#a)e* 2012 I*C6 !urnover @ Sales ? Inventories @ A7,036 ? A1,716 @ 610 B In&ustr+ Inv6 !urnover @ 661

Inventor+ turnover is belo< in&ustr+ avera,e6 (D'eon .i,ht have ol& inventor+, or its control .i,ht be )oor6 *o i.)rove.ent is currentl+ 7orecaste&6

2012 (S3 is the avera,e nu.ber o7 &a+s a7ter .a/in, a sale be7ore receivin, cash6 (S3 @ Receivables ? Avera,e sales )er &a+ @ Receivables ? Sales?365 @ A878 ? 4A7,036?3655 @ 566 I*(ES!RF (S3 @ 3260

A))raisal o7 (S3 (D'eon collects on sales too slo<l+, an& ,ettin, <orse6 (D'eon has a )oor cre&it )olic+6 2012 Fi+e( asset an( total asset tu#no&e# #atios &s' t%e in(ust#y a&e#a)e $A turnover @ Sales ? *et 7i%e& assets 3

@ A7,036 ? A817 @ 8661% 760B !A turnover@ Sales ? !otal assets @ A7,036 ? A3, "7 @ 2601% 266B

In&ustr+ $A !urnover @

In&ustr+ !A !urnover @

0valuatin, the $A turnover an& !A turnover ratios $A turnover )ro=ecte& to e%cee& the in&ustr+ avera,e !A turnover is belo< the in&ustr+ avera,e6 Cause& b+ e%cessive current assets6 Debt Ratios Calculate t%e (ebt #atio, T E, an( E- T!A co&e#a)e #atios'

2012
(ebt ratio @ !otal &ebt ? !otal assets @ 4A1,1 5 G A 005 ? A3, "7 @ 62H 50H !I0 @ 0BI! ? Interest e%)ense @ A "266 ? A70 @ 760% 1.
Times-interestearned ratio

In&ustr+ (ebt Ratios @

In&ustr+ !I0 @ 63B

The H.R. Pickett Corporation has $500,000 of debt outstandin , and it pa!s an interest rate of 10 percent annua""!. Pickett#s annua" sa"es are $2 $i""ion, its a%era e ta& rate is 30 percent, and its net profit $ar in on sa"es is 5 percent. 'f the co$pan! does not $aintain a T'( ratio of at "east 5 ti$es, its bank )i"" refuse to rene) the "oan, and bankruptc! )i"" resu"t. *hat is Pickett#s T'( ratio+

0BI!(A covera,e
@

2012 40BI!(AG'ease ).ts5 Int e%) G 'ease ).ts G 8rinci)al ).ts In&ustr+ 0BI!(A Covera,e @

A60"66 G A 0 ? A70 G A 0 G A0

860B @ 56"%
2. *i""is Pub"ishin has $30 bi""ion in tota" assets. The co$pan!#s basic earnin po)er ,-(P. ratio EBITDA is 20 percent, and its ti$es/interest/earned ratio is 0.0. *i""is# depreciation and a$orti1ation

co erage ratio

e&pense tota"s $3.2 bi""ion. 't has $2 bi""ion in "ease pa!$ents and $1 bi""ion $ust o to)ard principa" pa!$ents on outstandin "oans and "on /ter$ debt. *hat is *i""is# (-'T34 co%era e ratio+

Io< &o the &ebt .ana,e.ent ratios co.)are <ith in&ustr+ avera,es: (?A an& !I0 are better than the in&ustr+ avera,e, but 0BI!(A covera,e still trails the in&ustr+

P#ofitability #atios: 8ro7it .ar,in an& Basic earnin, )o<er 2012 8ro7it .ar,in @ *et inco.e ? Sales -267H @ A25366 ? A7,036 @ 366H 365H 2012 B08 @ 0BI! ? !otal assets - 66 @ A "266 ? A3, "7 @ 1 61H 2011 Co.)an+ 8> @ In&ustr+ 8ro7it >ar,in @

2011 Co.)an+ B08 @ In&ustr+ B08 @ 1"61H

A))raisin, )ro7itabilit+ <ith the )ro7it .ar,in an& basic earnin, )o<er 2010 8> an& B08 <ere ver+ ba& in 20106

8ro7itabilit+ ratios: Retu#n on assets an( Retu#n on equity

2012
R3A @ *et inco.e ? !otal assets @ A25366 ? A3, "7 @ 763H In&ustr+ R3A @ "61H

R30 @ *et inco.e ? !otal co..on e1uit+ @ A25366 ? A1,"52 @ 1360H In&ustr+ R30 @ 1862H

A))raisin, )ro7itabilit+ <ith the return on assets an& return on e1uit+ Both ratios are belo< in&ustr+ avera,e !.
Ratio ca"cu"ations

5raser Truckin has $12 bi""ion in assets, and its ta& rate is 20 percent. The co$pan!#s basic earnin po)er ,-(P. ratio is 15 percent, and its return on assets ,R64. is 5 percent. *hat is 5raser#s ti$es/interest/earned ,T'(. ratio+

Effects of (ebt on R.A an( R.E R3A is lo<ere& b+ &ebt--interest lo<ers *I, <hich also lo<ers R3A @ *I?Assets6 But use o7 &ebt also lo<ers e1uit+, hence &ebt coul& raise R30 @ *I?01uit+6

8roble.s <ith R30 R30 an& sharehol&er <ealth are correlate&, but )roble.s can arise <hen R30 is the sole .easure o7 )er7or.ance6 R30 &oes not consi&er ris/6 R30 &oes not consi&er the a.ount o7 ca)ital investe&6 >i,ht encoura,e .ana,ers to .a/e invest.ent &ecisions that &o not bene7it sharehol&ers6

R30 7ocuses onl+ on return6 A better .easure is one that consi&ers both ris/ an& return6

Calculate t%e P#ice/Ea#nin)s, P#ice/Cas% flo0, an( 1a#2et/-oo2 #atios' 2012 8?0 @ 8rice ? 0arnin,s )er share @ A12617 ? A1601 @ 1260% In&ustr+ 8?0 @ 1 62 B 8?C$ @ 8rice ? Cash 7lo< )er share @ A12617 ? J4A25366 G A117605 K 250L @ 8621% In&ustr+ 8?C$ @ 1160 B Calculate the 8rice?0arnin,s, 8rice?Cash 7lo<, an& >ar/et?Boo/ ratios6 2012 7

>?B

@ >/t )rice )er share ? Boo/ value )er share @ A12617 ? 4A1,"52 ? 2505 @ 1656% In&ustr+ >B @ 26 B

Anal+;in, the .ar/et value ratios 8?0: Io< .uch investors are <illin, to )a+ 7or A1 o7 earnin,s6 8?C$: Io< .uch investors are <illin, to )a+ 7or A1 o7 cash 7lo<6 >?B: Io< .uch investors are <illin, to )a+ 7or A1 o7 boo/ value e1uit+6 $or each ratio, the hi,her the nu.ber, the better6 8?0 an& >?B are hi,h i7 R30 is hi,h an& ris/ is lo<6

0%ten&e& (u8ont e1uation: Brea/in, &o<n Return on e1uit+ 2012 R30 @ 48ro7it .ar,in5 % 4!A turnover5 % 401uit+ .ulti)lier5 @ 366H % 2 % 168 @ 1360H !he (u 8ont s+ste. Also can be e%)resse& as: R30 @ 4*I?Sales5 % 4Sales?!A5 % 4!A?01uit+5

$ocuses on: 0%)ense control 48>5 Asset utili;ation 4!A!35 (ebt utili;ation 4016 >ult65

Sho<s ho< these 7actors co.bine to &eter.ine R306 !ren& anal+sis

Anal+;es a 7ir.Ds 7inancial ratios over ti.e Can be use& to esti.ate the li/elihoo& o7 i.)rove.ent or &eterioration in 7inancial con&ition6

#.

Ba"ance s$eet ana"ysis

Co$p"ete the ba"ance sheet and sa"es infor$ation in the tab"e that fo""o)s for Hoff$eister 'ndustries usin the fo""o)in financia" data9 3ebt ratio9 50: Current ratio9 1.0& Tota" assets turno%er9 1.5& 3a!s sa"es outstandin 9 37.5 da!sa 5ross profit $ar in on sa"es9 ,;a"es /Cost of oods so"d.<;a"es = 25: 'n%entor! turno%er ratio9 5 > a Ca"cu?ation is based on a 375/da! !ear. BALA%&E '(EEET Cash 4ccounts recei%ab"e 'n%entories @i&ed assets Tota" assets ;a"es $300,000 4ccounts pa!ab"e ?on /ter$ debt Co$$on stock Retained earnin s 98,500 70,000

Tota" "iabi"ities A eBuit! Cost of oods so"d

Ratio ca"cu"ations

5.

4ssu$e !ou are i%en the fo""o)in re"ationships for the -rauer Corporation9 ;a"es<tota" Return on assets ,R64. Return on eBuit! ,R6(. 1.5& 3: 5:

Ca"cu"ate -rauerCs profit $ar in and debt ratio

Co.)arison <ith in&ustr+ avera,es is &i77icult 7or a con,lo.erate 7ir. that o)erates in .an+ &i77erent &ivisions6 MAvera,eN )er7or.ance is not necessaril+ ,oo&, )erha)s the 7ir. shoul& ai. hi,her6 Seasonal 7actors can &istort ratios6 M9in&o< &ressin,N techni1ues can .a/e state.ents an& ratios

loo/ better6 >ore issues re,ar&in, ratios (i77erent o)eratin, an& accountin, )ractices can &istort co.)arisons6 So.eti.es it is har& to tell i7 a ratio is M,oo&N or Mba&N6 (i77icult to tell <hether a co.)an+ is, on balance, in stron, or <ea/ )osition6 Oualitative 7actors to be consi&ere& <hen evaluatin, a co.)an+Ds 7uture 7inancial )er7or.ance Are the 7ir.Ds revenues tie& to 1 /e+ custo.er, )ro&uct, or su))lier: 9hat )ercenta,e o7 the 7ir.Ds business is ,enerate& overseas: Co.)etition $uture )ros)ects 'e,al an& re,ulator+ environ.ent