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of ratios which are derived from the information in a company's financial statements.
comparisons. Ratios are used to highlight weaknesses and strengths. Ratio comparisons should be made through time and with competitors
Trend analysis Peer (or Industry) analysis
Ratio Comparisons
Peer or Industry Analysis (Cross-sectional analysis) involves the comparison of different firms financial ratios at the same point in time; involves comparing the firms ratios to those other firms in its industry or to industry averages.
Trend Analysis (Time-series analysis) involves the
evaluation of the firms financial performance over time using financial ratios. Comparison of current to past performance, using ratio analysis, allows the firm to determine whether it is progressing as planned.
difficult for a conglomerate firm that operates in many different divisions. Average performance is not necessarily good, perhaps the firm should aim higher. Seasonal factors can distort ratios. Window dressing techniques can make statements and ratios look better.
or bad. Difficult to tell whether a company is, on balance, in strong or weak position.
What are the major categories of ratios, and what questions do they answer?
Liquidity: Can we make required payments?
Asset management: right amount of assets
vs. sales?
equity?
costs, and are sales high enough as reflected in PM, ROE, and ROA?
LIQUIDITY RATIOS
Ratios that show the relationship of a firms cash and other assets to its current liabilities
CA
CL It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future
Current Ratio
It measures a firm's ability CA inventories to pay off short-term obligations to more liquid CL type of assets.
Days Sales
Outstanding
(DSO)
Also called the average Receivables collection period (ACP), it indicates the average length Average sales of time the firm must wait per day after making a sale before it receives cash.
Debt Ratio
Times Interest Earned (TIE) Ratio
EBITDA Coverage
It shows if earnings are able to satisfy all financial obligations including leases and principal payments.
PROFITABILITY RATIOS
A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
Net income
Sales
It gives an idea as to how management Totals assets efficient is at using its assets to generate earnings.
Net income
PROFITABILITY RATIOS
EBIT
Total assets
Net income Common equity
Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets
2011E 436,800 300,000 408,000 1,144,800 400,000 1,721,176 231,176 1,952,352 3,497,152
2010 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592
Income statement
2011E 7,035,600 5,875,992 550,000 609,608 116,960 492,648 70,008 422,640 169,056 253,584 2010 6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176)
Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income
Other data
No. of shares EPS DPS Stock price Lease pmts
Calculate DLeons forecasted current ratio and quick ratio for 2011.
Current ratio = CA/ CL = $2,680 / $1,145 = 2.34x Quick ratio = (CA Inventories) / CL = ($2,680 $1,716) / $1,145 = 0.84x
2010
1.20x
0.39x
2009
2.30x
0.85x
Ind.
2.70x
1.00x
2.34x
0.84x
Expected to improve but still below the industry average. Liquidity position is weak.
2010
4.70x
2009
4.8x
Ind.
6.1x
average. DLeon might have old or too much inventory, which is expensive because
DSO is the average number of days after making a sale before receiving cash.
DSO= Receivables / Avg sales per day = Receivables/(Annualsales/365)
= $878 / ($7,036/365) = 45.6 days
Appraisal of DSO
2011E
DSO
2010
38.2
2009
37.4
Ind.
32.0
45.6
DLeon collects on sales too slowly, and is getting worse. DLeon has a poor credit policy*.
*Clear, written guidelines that set (1) the term and conditions for supplying goods on credit, (2) customer qualification criteria, (3) procedure for making collections, and (3) steps to be taken in case of customer delinquency.
Fixed assets and total assets turnover ratios vs. the industry average
FA turnover = Sales / Net fixed assets = $7,036 / $817 = 8.61x
TA turnover = Sales / Total assets
2010
6.4x 2.1x
2009
10.0x 2.3x
Ind.
7.0x 2.6x
8.6x 2.0x
FA turnover projected to exceed the industry average. TA turnover below the industry average. Caused by excessive currents assets (A/R and Inv).
2010
82.8% -1.0x 0.1x
2009
54.8% 4.3x 3.0x
Ind.
50.0% 6.2x 8.0x
D/A and TIE are better than the industry average, but EBITDA coverage still trails the industry.
Appraising profitability with the profit margin and basic earning power
2011E
PM BEP
2010
-2.7% -4.6%
2009
2.6% 13.0%
Ind.
3.5% 19.1%
3.6% 14.1%
Profit margin was very bad in 2010, but is projected to exceed the industry average in 2011. Looking good.. BEP projected to improve, yet still below the industry average. There is definitely room for improvement.
2010
-5.6% -32.5%
2009
6.0% 13.3%
Ind.
9.1% 18.2%
7.3% 13.0%
Both ratios rebounded from the previous year, but are still below the industry average. More improvement is needed.
INDUSTRY COMPARISON
The list of companies represents one industry. What can you say about Dolphins ROA compared to the industrys numbers?
Panther
Revenue Net Income Assets
Jaguar
Sharks
Dolphin
695,000
18,500,000
875,000
26,500,350
745,000
23,000,500
Daily Receivables
100,000
95,000
105,000
102,500
INDUSTRY COMPARISON
ROA (Panther) = Net income / Total assets =775,000 /22,500,000 =3.44%
INDUSTRY COMPARISON
ROA (Panther) = Net income / Total assets =775,000 /22,500,000 =3.44%
ROA (Jaguar)
INDUSTRY COMPARISON
ROA (Shark) = Net income / Total assets =875,000 /26,500,350 =3.30%
INDUSTRY COMPARISON
ROA (Shark) = Net income / Total assets =875,000 /26,500,350 =3.30%
INDUSTRY COMPARISON
Panther Jaguar Sharks Ind. Dolphin Average
ROA
3.44%
3.76%
3.30%
3.24%
3.44%
= 3.44%
Revenue
Net Income Assets Daily Receivables
695,000
18,500,000
875,000
26,500,350
745,000
23,000,500
100,000
95,000
105,000
102,500
ROA
3.44%
3.76%
3.30%
3.24%
Dolphin's ROA
3.80 3.70 3.60 3.50 3.40 3.30 3.20 3.10 3.00 2.90
20081 2009 2 2010 3 2011 4
ROA
Assets
2011 13.7
2010
Cash
Short-term investments Accounts receivable Inventory Other current assets
$ 2.2
24.0
$ 1.2
13.0
$13.2
11.6
7.5
7.3 9.0
5.4
7.2 1.5
Common Stock
Retained Earnings
10.0
35.3
10.0
21.5
Intangible assets
Total assets
33.0
$ 83.0
28.0
$ 56.3 Total liabilities and $ 83.0 $ 56.3 Stockholders Equity
Assets Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets
33.0 $ 83.0
28.0 $ 56.3
45.3 $ 83.0
31.5 $ 56.3
= = = = = =
= CA/ CL = $50/ $24 = 2.08x Current ratio (2010) = CA/ CL = $28.3/ $13.2 = 2.14x 2. Did Lows Companys current ratio, deteriorated, improved or hold steady during the 2011?
2. Did Lows Companys current ratio, deteriorated, improved or hold steady during the 2010? Deteriorated