Professional Documents
Culture Documents
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4
I
n the previous chapter, we reviewed the four basic financial statements that are
contained in the annual report. This chapter deals with financial ratio analysis,
which uses information contained in financial statements. Financial ratios are
statistical yardsticks that relate two numbers generally taken from a firms income
statement, balance sheet, or both. They enable interested parties to make relative
comparisons of firm performance over time as well as compare performance
across different firms.
Evaluation of Firm
Performance
4
chapter
Chapter 4 Evaluation of Firm Performance 91
92 Part 1 Introduction
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http:
An excellent source for
financial ratio analysis
assistance, including a free
ratio analysis spreadsheet, is
provided by the Small Busi-
ness Administration at
http://www.onlinewbc.
gov/docs/finance/index.
html
PURPOSE OF FINANCIAL RATIOS
Financial ratios are used by management for analysis, monitoring, and planning
purposes.
As an analytical tool, financial ratios can assist management in identifying
strengths and weaknesses in a firm. They can indicate whether a firm has
enough cash to meet obligations; a reasonable accounts receivable collection
period; an efficient inventory management policy; sufficient property, plant,
and equipment; and an adequate capital structureall of which are necessary
if a firm is to achieve the goal of maximizing shareholder wealth. Financial
analysis also can be used to assess a firms viability as an ongoing enterprise
and to determine whether a satisfactory return is being earned for the risks
taken.
Financial ratios are also a useful monitoring device. On the basis of financial ra-
tio analysis, management may uncover a problem in a certain area of the
firms operations and institute remedial action. Through a regular review of
relevant financial ratios, management can monitor whether or not the reme-
dial actions are working.
Financial ratios provide a very effective role in planning. In Chapter 1 we said
that the objective of every firms managers should be to maximize shareholder
wealth. For this appropriate objective to be successful, it needs to be opera-
tionalized. Financial ratios allow management to translate goals into opera-
tional objectives. In other words, simply urging all employees to maximize
shareholder wealth will probably not be very effective. On the other hand, set-
ting targets in terms of specific ratios, such as the average collection period or
inventory turnover, will likely yield better results, because financial ratios are
specific, measurable, and easy to relate to.
Financial ratio analyses are used also by persons other than financial man-
agers. For example, credit managers may examine some basic financial ratios con-
cerning a prospective customer when deciding whether to extend credit. Security
analysts and investors use financial analysis to help assess the investment worth of
different securities. Bankers use the tools of financial analysis when deciding
whether to grant loans. Financial ratios have been used successfully to forecast such
financial events as impending bankruptcy. Unions, such as the United Auto Work-
ers (UAW), refer to financial ratios when negotiating collective bargaining agree-
ments with employers. Finally, students and other job hunters may perform finan-
cial analyses of potential employers to determine career opportunities.
INTERPRETING FINANCIAL RATIOS
A financial ratio is a relationship that indicates something about a firms activities,
such as the ratio between the firms current assets and current liabilities or between
Chapter Objectives
After reading this chapter, you should have an understanding of the following:
1. The usefulness of financial ratio analysis
2. How to calculate and interpret commonly used financial ratios
3. The limitations of financial ratio analysis
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firm in the industry must convert $0.32 ($1.00/$3.12 5 $0.32) of each dollar of
current assets into cash to meet short-term obligations. Thus, Furniture Brands
current ratio appears to be well above the industry average and hence less risky.
However, one must be careful in making any strong judgments without under-
taking a more thorough analysis. A higher current ratio is not necessarily indicative
of better liquidity. For example, a higher current ratio may be due to greater inven-
tory levels compared to the industry, which, in turn, could be indicative of the firm
having trouble moving things off the shelf. The financial analyst must dissect, or
go behind, the ratio to discover why it differs from the industry average and de-
termine whether a serious problem exists.
Quick Ratio The quick ratio is defined as follows:
This ratio, sometimes called the acid test, is a more stringent measure of liquidity
than the current ratio. Sometimes the numerator of the quick ratio is defined sim-
ply as the current ratio minus inventory. The quick ratio takes into account only
the most liquid of current assets (defined as cash, marketable securities, and
accounts receivable) and eliminates all others (including inventory and prepaid
expenses) from consideration. By subtracting inventories from current assets, this
ratio recognizes that a firms inventories are often one of its least liquid current
assets. This is, of course, more applicable to some industries than to others. For ex-
ample, if you are an apparel manufacturer, the ability to liquidate your inventory at
fair value is highly doubtful. On the other hand, if you manufacture a commodity
product such as newsprint, you may have greater confidence in the value of the in-
ventory, especially if the prices are stable. Referring to the figures on Furniture
Brands balance sheet, the firms quick ratio at year-end 2000 is calculated as:
The industry average is 1.75 times. Consistent with the current ratio, Furniture
Brands quick ratio is above the industry average and appears to be less risky.
Asset Management Ratios
One objective of financial management is to determine how a firms resources can
be best distributed among the various asset accounts. If a proper mix of cash, re-
ceivables, inventories, property, plant, and equipment can be achieved, the firms
asset structure will be more effective in generating sales revenue.
Asset management ratios indicate how much a firm has invested in a particular
type of asset (or group of assets) relative to the revenue the asset is producing. By
comparing asset management ratios for the various asset accounts of a firm with established
industry norms, an analyst can determine how efficiently a firm is allocating its resources.
This section discusses several types of asset management ratios, including the
average collection period, the inventory turnover ratio, the fixed-asset turnover ratio, and
the total asset turnover ratio.
Average Collection Period The average collection period is the average number of
days an account receivable remains outstanding. It usually is determined by divid-
ing a firms year-end receivables balance by the average daily credit sales (based on
a 365-day year):
$14.606 1 $351.804
$143.118
5
$366.41
$143.118
5 2.56 times
Quick ratio 5
Cash 1 Marketable securities 1 Accounts receivable
Current liabilities
96 Part 1 Introduction
(4.2)
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Assuming all sales for Furniture Brands are for credit, the average collection pe-
riod ratio at year-end 2000 can be calculated as $351.804/($2,116.239/365 days) 5
$351.804/$5.798 per day 5 60.7 days. The industry average for this ratio is 49.4
days. Furniture Brands ratio is well above the industry average. This may not nec-
essarily be alarming. There may be legitimate reasons why the average collection
period for Furniture Brands is higher than the industry average. Some reasons
would be:
The difference in ratios between Furniture Brands and the industry average
could be due to differences in the credit terms offered by Furniture Brands
and the industry in general. Furniture Brands, for instance, may give their cus-
tomers a longer time periodsay, 60 daysto pay for the merchandise pur-
chased, while the industry norm may call for a shorter credit termsay,
45 days. We dont know this for sure, since this information is not always avail-
able from the annual reports, but it is a possible explanation.
The difference may be due to differences in the customer composition. Firms
in a given industry may operate in several different segments, each with their
own collection policies. For example, Ethan Allen, one of the larger compe-
titors of Furniture Brands, sells a significant portion of its output through
company-owned outlets. Thus, Ethan Allen is both a manufacturer and a re-
tailer, unlike Furniture Brands, which has no retail presence. Indeed, Ethan
Allens average collection period is only 14.6 days, which may explain why the
industry average we calculated is comparatively lower. Flexsteel, another firm
in the industry, manufactures residential furniture but is also a major supplier
of upholstered sofas and other furniture to the recreational vehicle market.
The collection terms in that industry may be shorter than in the residential
furniture market, again yielding a lower industry average.
Consequently, there are may be perfectly valid reasons why a firm may have a
higher-than-average collection period. This is where additional investigation is
needed. If Furniture Brands higher collection period does not have a sound basis,
this could indicate problems with the firms credit terms and their collection effort.
Assuming that there is a problem with the collections effort, an analyst could con-
clude that by bringing the average collection period for Furniture Brands down to
the industry average of 49.4 days, the firm can release funds that are tied up in
accounts receivable. The released funds would amount to (60.7 days 2 49.4 days)
3 $5.798 million average credit sales per day 5 $65.52 million. The firm can more
profitably employ these funds elsewhere, for example, retiring long-term debt
and/or adding to plant and equipment.
Inventory Turnover Ratio The inventory turnover ratio is defined as follows:
Whereas the cost of sales is usually listed on a firms income statement, the average
inventory has to be calculated. This can be done in a number of ways. For exam-
ple, if a firm has been experiencing a significant and continuing rate of growth in
sales, the average inventory may be computed by adding the figures for the begin-
ning and ending inventories for the year and dividing by 2. If sales are seasonal or
Inventory turnover 5
Cost of sales
Average inventory
Average collection period 5
Accounts receivable
Annual credit sales>365
Chapter 4 Evaluation of Firm Performance 97
(4.4)
(4.3)
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The choice of technology. Two firms in the same industry, producing similar
products, may adopt different technologies; one firm may rely on a consider-
able level of automation, while another firm may adopt a more labor-intensive
manufacturing process. Also some firms may rely more heavily on subcontrac-
tors to do part of the manufacturing, consequently reducing the amount of in-
vestment needed in property, plant, and equipment.
Because of these factors, it is possible for firms manufacturing virtually identi-
cal products to have significantly different fixed asset turnover ratios. Thus, the ra-
tio should be used primarily for year-to-year comparisons within the same company,
rather than for intercompany comparisons.
Furniture Brands fixed asset turnover ratio is $2,116.239/$303.235 5 6.98
times, slightly above the industry average of 6.3 times.
Total Asset Turnover Ratio The total asset turnover ratio is defined as follows:
It indicates how effectively a firm uses its total resources to generate sales and is a
summary measure influenced by each of the asset management ratios previously
discussed.
Furniture Brands total asset turnover ratio is $2,116.239/$1,304.838 5 1.62
times, almost identical to the industry average of 1.63.
1. What is the rationale for computing the quick ratio?
2. Is a lower average collection period more desirable than a higher one? Explain.
3. What are some problems with the fixed asset turnover ratio?
Financial Leverage Management Ratios
Whenever a firm finances a portion of its assets with any type of fixed-charge fi-
nancingsuch as debt, preferred stock, or leasesthe firm is said to be using
financial leverage. Financial leverage management ratios measure the degree to which a
firm is employing financial leverage and, as such, are of interest to creditors and owners
alike.
Both long- and short-term creditors are concerned with the amount of lever-
age a firm employs, because it indicates the firms risk exposure in meeting debt
service charges (that is, interest and principal repayment). A firm that is heavily fi-
nanced by debt offers creditors less protection in the event of bankruptcy. For ex-
ample, if a firms assets are financed with 85 percent debt, the value of the assets
can decline by only 15 percent before creditors funds are endangered. In contrast,
if only 15 percent of a firms assets are debt-financed, asset values can drop by 85
percent before jeopardizing the creditors.
Owners are interested in financial leverage because it influences the rate of re-
turn they can expect to realize on their investment and the degree of risk involved.
For example, if a firm is able to borrow funds at 9 percent and employ them at 12
percent, the owners earn the 3 percent difference and may view financial leverage
favorably. On the other hand, if the firm can earn only 3 percent on the borrowed
Total asset turnover 5
Sales
Total assets
Chapter 4 Evaluation of Firm Performance 99
(4.6)
Comprehension Check Questions
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funds, the 26 percent difference (3% 2 9%) will result in a lower rate of return to
the owners.
Either balance sheet or income statement data can be used to measure a firms
use of financial leverage. The balance sheet approach gives a static measure of finan-
cial leverage at a specific point in time and emphasizes total amounts of debt,
whereas the income statement approach provides a more dynamic measure and re-
lates required interest payments on debt to the firms ability to pay. Both approaches
are employed widely in practice.
There are several types of financial leverage management ratios, including the
debt ratio, the debt-to-equity ratio, the times interest earned ratio, and the fixed-
charge coverage ratio.
Debt Ratio The debt ratio is defined as follows:
It measures the proportion of a firms total assets that is financed with credi-
tors funds. As used here, the term debt encompasses all short-term liabilities and
long-term liabilities. Some individuals prefer to use a narrower definition of debt
and consider only interest-charging liabilities such as long-term debt or bonds,
notes payable, and lines of credit.
Bondholders and other long-term creditors are among those likely to be inter-
ested in a firms debt ratio. They tend to prefer a low debt ratio, because it provides
more protection in the event of liquidation or some other major financial problem.
As the debt ratio increases, so do a firms fixed-interest charges. If the debt ratio
becomes too high, the cash flows a firm generates during economic recessions may
not be sufficient to meet interest payments. Thus, a firms ability to market new
debt obligations when it needs to raise new funds is crucially affected by the size of
the debt ratio and by investors perceptions about the risk implied by the level of
the ratio.
Debt ratios are stated in terms of percentages. Furniture Brands debt ratio as
of year-end 2000 is ($143.118 1 $462.000 1 $115.815)/$1,304.838 5 $720.933/
$1,304.838 5 0.55251, or about 55 percent. The numerator is the sum of all cur-
rent liabilities, long-term debt, and other long-term liabilities. The ratio is inter-
preted to mean that Furniture Brands creditors are financing 55 percent of the
firms total assets. Furniture Brands debt ratio is considerably greater than the
32 percent industry average. Evidently Furniture Brands management has relied
on debt to a much greater extent than does the industry on average in financing as-
sets. The high leverage ratio also means that shareholders of Furniture Brands may
be subject to significantly greater bankruptcy risk than other firms in the industry.
Debt-to-Equity Ratio The debt-to-equity ratio is defined as follows:
It is similar to the debt ratio and relates the amount of a firms debt financing to
the amount of equity financing. Actually, the debt-to-equity ratio is not really a new
ratio; it is simply the debt ratio in a different format. The debt-to-equity ratio also is
stated as a percentage. Furniture Brands debt-to-equity ratio at year-end 2000 is
$720.933/$583.905 5 1.235, or 123.5 percent. The industry average is 48 percent.
In other words, the average firm in the industry raised approximately $0.48 in lia-
Debt-to-equity 5
Total debt
Total equity
Debt ratio 5
Total debt
Total assets
100 Part 1 Introduction
(4.7)
(4.8)
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bilities for each dollar of equity in the firm. In contrast, Furniture Brands uses
$1.24 of liabilities for every dollar of equity financing. This shows that Furniture
Brands has been following a very aggressive financing policy and probably has little
flexibility in terms of future borrowing capacity. From the perspective of creditors,
it means that Furniture Brands is probably not a good credit risk relative to the
average firm in the industry, and creditors either would not be eager to lend to Fur-
niture Brands or would do so only by charging higher interest rates than for the
average firm in the industry.
Because most interest costs are incurred on long-term borrowed funds
(greater than 1 year to maturity) and because long-term borrowing places multi-
year, fixed financial obligations on a firm, some analysts also consider the ratio of
long-term debt-to-total assets, or long-term-debt-to-equity. For Furniture Brands the long-
term-debt-to-total-assets ratio is 35.4 percent. The comparable industry average is
9.2 percent. The long-term-debt-to-equity ratio for Furniture Brands is 79.1 per-
cent. The corresponding industry average is 14.6 percent. These figures once again
confirm the aggressive financing policy of Furniture Brands. Some analysts con-
sider all noncurrent liabilities as long-term debt, in our calculations we only con-
sider liabilities identified as long-term debt.
Times Interest Earned Ratio The times interest earned (TIE) ratio is defined as follows:
Often referred to as simply interest coverage, this ratio employs income statement
data to measure a firms use of financial leverage. It tells the analyst the extent to
which the firms current earnings are able to meet current interest payments. The
EBIT figures are used because the firm makes interest payments out of operating
income, or EBIT. When the times interest earned ratio falls below 1.0, the contin-
ued viability of the enterprise is threatened because the failure to make interest
payments when due can lead to bankruptcy.
From Furniture Brands income statement we note that the company incurred
interest expense of $36.389 million in 2000. The firms operating earning or EBIT
was $192.614 million. In other words, Furniture Brands covers annual interest
payments 5.29 times; this figure is significantly below the industry average of
31.8 times. It is clear from the debt, debt-to-equity, and times interest earned ratios
that Furniture Brands has followed an aggressive financing policy.
Fixed-Charge Coverage Ratio The fixed-charge coverage ratio is defined as follows:
It measures the number of times a firm is able to cover total fixed charges, which in-
clude (in addition to interest payments) preferred dividends and payments re-
quired under long-term lease contracts. Many corporations also are required to
make sinking fund payments on bond issues; these are annual payments aimed at
either retiring a portion of the bond obligation each year or providing for the ulti-
mate redemption of bonds at maturity. Under most sinking fund provisions, the
firm either may make these payments to the bondholders representative (the
trustee), who determines through a lottery process which of the outstanding bonds
will be retired, or deliver to the trustee the required number of bonds purchased
Fixed-charge coverage 5
(EBIT) 1 lease payments
Interest 1 lease payments 1 preferred
dividends before tax 1 before tax sinking fund
Times interest earned 5
Earnings before interest and taxes (EBIT)
Interest charges
Chapter 4 Evaluation of Firm Performance 101
(4.9)
(4.10)
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by the firm in the open market. Either way, the firms outstanding indebtedness is
reduced.
In calculating the fixed-charge coverage ratio, an analyst must consider each
of the firms obligations on a before-tax basis. However, because sinking fund pay-
ments and preferred stock dividends are not tax deductible and therefore must be
paid out of after-tax earnings, a mathematical adjustment has to be made. After-tax
payments must be divided by (1 2 T), where T is the marginal tax rate. This effec-
tively converts such payments to a before-tax basis, or one that is comparable to the
EBIT. And, since lease payments are deducted in arriving at the EBIT, they must be
added back into the numerator of the ratio, because the fixed charges (in the de-
nominator) also include lease payments.
The fixed-charge coverage ratio is a more severe measure of a firms ability to
meet fixed financial obligations. It is not always easy to calculate the fixed-charge
coverage ratio because information, especially on lease payments and sinking fund
payments, is not always readily available from the financial statements. For Furni-
ture Brands, the notes to the financial statements reveal that the firm incurred
lease payments of $18.514 million in 2000 and that there were no sinking fund pay-
ments. From the balance sheet we know that the firm did not have any preferred
shares outstanding, therefore no preferred dividends were paid out. Using these
numbers, Furniture Brands fixed-charge coverage ratio is: ($192.614 1 $18.514)/
($36.389 1 $18.514) 5 $211.128/$54.903 5 3.8 times. We do not have a compara-
ble industry average, as the necessary information was not available in the financial
statements for all five firms used in constructing the industry average.
Profitability Ratios
More than any other accounting measure, a firms profits demonstrate how well
the firm is making investment and financing decisions. If a firm is unable to pro-
vide adequate returns in the form of dividends and share price appreciation to in-
vestors, it may be unable to maintain, let alone increase, its asset base. Profitability
ratios measure how effectively a firms management is generating profits on sales, total assets,
and, most importantly, stockholders investment. Therefore, anyone whose economic in-
terests are tied to the long-run survival of a firm will be interested in profitability
ratios.
There are several types of profitability ratios, including the gross profit margin
ratio, the net profit margin ratio, the return on investment ratio, and the return on stock-
holders equity ratio.
Gross Profit Margin Ratio The gross profit margin ratio is defined as follows:
It measures the relative profitability of a firms sales after the cost of sales has been
deducted, thus revealing how effectively the firms management is making deci-
sions regarding pricing and the control of production costs. Furniture Brands
gross profit margin ratio is ($2,116.239 2 $1,529.874)/$2,116.239 5 27.7%, which
is in line with the industry average of 27.2 percent. This percentage indicates that
Furniture Brands cost of production is consistent with the industrys experience.
Net Profit Margin Ratio The net profit margin ratio is defined as follows:
Net profit margin 5
Earnings after tax (EAT)
Sales
Gross profit margin 5
Sales 2 Cost of sales
Sales
102 Part 1 Introduction
(4.11)
(4.12)
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It measures how profitable a firms sales are after all expenses, including taxes
and interest, have been deducted. Furniture Brands net profit margin ratio is
$105.901/$2,116.239 5 5.0%, which is below the industry average of 5.70 percent.
Since the gross profit margin was nearly identical to the industry, the below-average
net profit margin is indicative of above-average operating expenses and/or interest
expenses. We noted previously that Furniture Brands relies heavily on debt financ-
ing, which entails significant interest expense. The significant interest expense as-
sociated with the high debt ratio appears to have depressed Furniture Brands net
profit margin relative to the industry average.
Some analysts also compute an operating profit margin ratio, defined as earnings
before interest and taxes (EBIT) or operating earnings/sales. It measures the prof-
itability of a firms operations before considering the effects of financing decisions.
Because the operating profit margin is computed before considering interest
charges, this ratio often is more suitable for comparing the profit performance of
different firms that may utilize varying amounts of debt financing.
Return on Investment (Total Assets) Ratio The return on investment ratio (ROI)
is defined as follows:
It measures a firms net income in relation to the total asset investment. Furniture
Brands return on investment ratio, $105.901/$1,304.838, is 8.1 percent, which is
somewhat below the industry average of 9.4 percent and consistent with the below-
average net profit margin for the firm.
Some analysts also like to compute the ratio of EBIT to total assets (EBIT/Total
Assets). This measures the operating profit rate of return for a firm. An after-tax
version of this ratio is earnings before interest and after tax (EBIAT) divided by
total assets. These ratios are computed before interest charges and may be more
suitable when comparing the operating performance of two or more firms that are
financed differently. Another variant of the operating performance ratio is the
ratio of earnings before interest, depreciation, and amortization (EBITDA)/total
assets. Many analysts prefer the EBITDA/total assets, since noncash expenses (de-
preciation and amortization expense) are ignored, giving a measure of operating
profits that is based more on cash flows.
Return on Stockholders Equity Ratio The return on stockholders equity ratio
(ROE) is defined as follows:
It measures the rate of return that the firm earns on stockholders equity. Because
only the stockholders equity appears in the denominator, the ratio is influenced di-
rectly by the amount of debt a firm is using to finance assets. Furniture Brands return
on stockholders equity ratio is $105.901/$583.905 518.1%. The comparable indus-
try average is 13.7 percent. Furniture Brands above-average performance on return
on stockholders equity but not on return on investments is attributable to the heavy
debt load taken on by the firm. With relatively higher debt financing, the firm is able
to spread its net income over a smaller base of stockholders equity, thereby increas-
ing the return on stockholders equity. (In a later section we will explain the relation
between return on investment and return on stockholders equity more completely.)
Return on stockholders equity 5
Earnings after tax (EAT)
Stockholders equity
Return on investment 5
Earnings after tax (EAT)
Total assets
Chapter 4 Evaluation of Firm Performance 103
(4.14)
(4.13)
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Market-based Ratios
The financial ratios discussed in the previous four groups all are derived from ac-
counting income statement and balance sheet information provided by the firm.
Market-based ratios provide an assessment of performance as perceived by the financial mar-
ket. The market-based ratios for a firm should parallel the accounting ratios of that
firm. For example, if the accounting ratios suggest that the firm has more risk than
the average firm in the industry and has lower profit prospects, this information
should be reflected in a lower market price of that firms stock.
Price-to-Earnings (P/E) Ratio The price-to-earnings ratio (P/E) is defined as follows:
(Some security analysts use next years projected earnings per share in the denomi-
nator; this is called a forward P/E. There is nothing wrong with this alternative def-
inition as long as comparisons between firms are done on the same basis.)
In general, the lower a firms risk, the higher its P/E ratio should be. In addition, the
better the growth prospects of its earnings, the greater is the P/E multiple. For example,
Merck & Co., a major drug company facing a number of patent expirations and,
therefore, questionable growth prospects, had a P/E multiple of approximately 18
in mid-2003. In contrast, Abbott Laboratories, another major player in the drug in-
dustry that did not face the same risk of lower growth prospects as Merck, enjoyed
a P/E multiple of approximately 27 in mid-2003.
Furniture Brands current (2000) earnings per share is $2.03 (net earnings of
$105.901 million divided by the 52.277 million shares outstanding reported in the
stockholders equity portion of the balance sheet). Note that this is different from
the basic earnings per share of $2.10 and diluted earnings per share of $2.14 re-
ported at the bottom of Furniture Brands income statement. Both the basic and
diluted earnings per share measures are based on accounting conventions that take
into account shares outstanding over the course of the year, adjustments for stock
repurchases, and adjustments for the dilutive effects of convertible securities and
stock options (Furniture Brands does not have any convertible securities but does
have stock options outstanding). The measure of earnings per share we calculate
simply divides the net income to common shareholders by the actual number of
shares issued as reported in the balance sheet; this is common practice among fi-
nancial analysts. Furniture Brands year-end closing price was $21.0625 per share.
The price is for December 29, 2000, the last day of trading in the year 2000. Divid-
ing the market price per share by the earnings per share yields Furniture Brands
P/E ratio of 10.4 times ($21.06/$2.03). Furniture Brands P/E ratio is about the
same as the industry average of 10.0 times. This suggests that the markets assess-
ment of Furniture Brands stock is about the same as the industry average.
As a supplement to the price-to-earnings ratio, financial analysts sometimes
also examine a firms stock-price-to-free-cash-flow ratio. Free cash flow represents the
portion of a firms total cash flow available to pay common stock dividends, to in-
vest in other projects (e.g., capital expenditures and/or acquisition of other com-
panies), and to service additional debt. Free cash flow often is viewed as a better
measure than earnings of the financial soundness of a firm. Earnings data some-
times can be misleading because accounting rules give companies discretion in
such areas as the recognition of revenues that have not been received and the allo-
cation of costs over different time periods. For example, Integrated Resources and
Todd Shipyards had good earnings, but had negative cash flow and were forced to
file for bankruptcy.
P>E 5
Market price per share
Current earnings per share
104 Part 1 Introduction
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Better than
industry average
Worse than
industry average
Worse than
industry average
Better than
industry average
Better than
industry average
Better than
industry average
earned
equity
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debt ratio appears to have been a problem for some time. While the industry av-
erage debt ratio appears to be stable around 30 percent, Furniture Brands ratio
was as high as about 75 percent in 1997. However, management has been aware
of the high debt ratio as revealed by the firms attempt to steadily pare down the
debt ratio from the high of 75 percent to approximately 55 percent in 2000. The
net profit margin for the firm has improved steadily over time but is still below
the industry average, which also has improved steadily over time (with the slight
exception of the last year). The below-average net profit margin performance of
Furniture Brands is likely due to the higher interest costs experienced by the firm
as a result of the high debt ratios. Note that the improvement in net profit mar-
gin over time is associated with the decrease in the debt ratio over time. Consis-
tent with the trend analysis of the net profit margin ratio, Furniture Brands re-
turn on investment has been below the industry average but is significantly
improved over time.
The final ratio we examine is the return on stockholders equity. Unlike the
other two profitability measures examined, net profit margin and return on invest-
ments, Furniture Brands compares very favorably with the industry over time with
respect to return on stockholders equity. The firm has consistently exceeded the
industry average in each of the five years although the gap has narrowed in the last
year.
In summary, the comparative financial ratio analysis combined with the trend
analysis provide the financial analyst with a fairly clear picture of Furniture Brands
performance. The firms liquidity is above average as revealed by the current and
quick ratios. The asset management ratios are on par with the industry although
the average collection period was of some concern. The financial leverage ratios
suggest that the firm has an excessively high debt ratio and low interest coverage
ratio. However, the trend analysis reveals that the firm has been steadily paring
down the debt ratio and in time may reach the industry average. The profitability
measures are mixed. The gross profit margin is just above the industry average, im-
plying that the cost of production for Furniture Brands is competitive with the in-
dustry. The net profit margin and return on investment are below the industry av-
eragesprobably a result of the high debt ratio assumed by the firm. The trend
analysis reveals that both the net profit margin and the return on investments have
improved over time coinciding with the steady decline in the debt ratios and corre-
sponding decrease in interest costs over time. The return on stockholders equity
has consistently beaten industry averages. Finally, the market-based ratios reveal
that the firms stock is viewed favorably relative to the industry average as revealed
in the P/E and P/BV ratios.
ANALYSIS OF PROFITABILITY:
A COMPREHENSIVE FRAMEWORK
The ROI and ROE profitability ratios discussed above can be broken down into
their constituent elements. Doing so gives us a better understanding of how differ-
ent factors combine to determine the overall profitability of the firm.
Return on Investment
We had previously defined the return on investment (ROI) as the ratio of earnings af-
ter taxes (EAT) to total assets. The ROI ratio can be examined more closely to pro-
vide additional insights into its significance. The ROI also can be viewed as a func-
tion of the net profit margin times the total asset turnover, because the net profit
margin ratio 5 EAT/sales and the total asset turnover ratio 5 sales/total assets:
Chapter 4 Evaluation of Firm Performance 109
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(4.16)
The equity multiplier ratio may be used to show how a firms use of debt to fi-
nance assets affects the return on equity, as follows:
Return on stockholders equity 5 (Net profit margin)
3 (Total asset turnover) 3 (Equity multiplier)
In Furniture Brands case, the return on stockholders equity is 5.00% 3 1.62 3
2.24 5 18.1%. For the industry, the corresponding calculation is 5.70% 3 1.63 3
1.47 5 13.7%. Although these figures are the same as the return on equity com-
puted directly by dividing earnings after tax by stockholders equity, the calcula-
tions shown illustrate more clearly how the return on investment is magnified into
a larger return on stockholders equity through the use of financial leverage. The
more debt a firm uses, the greater the equity multiplier effect. We can clearly see
here that Furniture Brands below-average ROI has been offset by the use of
greater financial leverage to yield an above-average return on stockholders equity.
Although increased use of debt can increase the return on equity, it comes at the
expense of greater risk.
5
Earnings after tax
Sales
3
Sales
Total assets
3
Total assets
Stockholders equity
112 Part 1 Introduction
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(4.20)
http:
Stern Stewart & Co. has a
comprehensive Web site on
EVA issues at
http://www.sternstewart.
com or at http://www.
eva.com
RECENT INNOVATION IN PERFORMANCE
MEASUREMENT: ECONOMIC VALUE ADDED (EVA
)
AN ALTERNATIVE MEASURE OF PERFORMANCE
Traditional financial analysis focuses on a set of financial ratios derived primarily
from accounting information. Using an approach such as DuPont analysis, a firms
financial performance can be dissected into its component elements. The ultimate
measure of firm performance is the return on common equity. Although insights
can be gained from this type of analysis, traditional financial analysis suffers from
weaknesses inherent in reported accounting information, and it does not directly
consider risk in the measure of performance. The greatest shortcoming of traditional fi-
nancial analysis is the lack of a direct tie between performances, as measured using financial
ratios, and shareholder wealth, as measured by the market price of a firms stock.
A recent innovation that addresses this shortcoming is the Economic Value
Added (EVA
Capital Cost
EVA (Year-End Return of
(Average) Operating on Capital
MVA Rank MVA Capital) Capital) Capital
(R)
(WACC)
1999 1998 1994 TIC Company Name 1999 1999 1999 1999 1999
1 1 10 MSFT Microsoft 629,407 5,796 20,034 51.78 12.62
2 2 2 GE General Electric 467,510 3,499 75,830 17.20 12.47
3 8 50 CSCO Cisco Systems 348,442 182 23,653 13.72 12.78
4 5 3 WMT Wal-Mart Stores 282,655 1,528 54,013 14.31 10.99
5 3 26 INTC Intel 253,907 4,695 29,825 30.55 12.19
6 9 LU Lucent Technologies 200,540 21,828 65,594 9.81 13.69
7 23 425 AOL America Online 187,558 2156 4,482 11.10 15.53
8 41 38 ORCL Oracle 154,263 605 5,413 24.59 12.42
9 11 78 IBM IBM 154,219 1,349 66,827 13.33 11.40
10 19 25 HD Home Depot 148,358 884 16,145 16.60 10.49
11 10 6 XOM ExxonMobil 144,687 4,440 180,040 11.67 8.16
12 4 5 MRK Merck 143,001 3,449 29,553 23.09 10.72
13 6 1 KO Coca-Cola 134,149 1,562 18,120 21.80 12.31
14 47 307 SUNW Sun Microsystems 133,953 595 5,954 23.85 13.03
15 14 430 DELL Dell Computer 132,609 1,330 7,302 46.33 14.79
16 43 YHOO Yahoo! 128,748 2862 8,847 22.66 15.99
17 15 11 PG Procter & Gamble 127,222 1,782 31,587 15.52 9.72
18 362 393 QCOM QUALCOMM 126,323 78 3,521 15.80 13.05
19 30 133 AIG American International 118,726 2119 48,774 10.44 10.70
Group
20 12 18 BMY Bristol-Myers Squibb 115,411 2,589 17,811 24.90 10.08
980 983 986 ORI Old Republic International 22,186 2195 3,851 4.87 9.93
Corporation
981 528 474 GT Goodyear Tire & Rubber 22,321 2407 13,453 4.65 8.02
982 998 999 NGH Nabisco 22,329 2869 11,207 1.98 6.22
983 967 993 CB Chubb Corporation 22,602 2677 12,484 4.38 10.14
984 338 449 S Sears Roebuck 23,019 282 34,269 6.70 6.94
985 309 152 MAT Mattel 23,277 24 10,652 7.81 7.87
986 479 496 CNC Conseco 23,298 5 9,135 12.89 12.82
987 302 96 JCP JCPenney 23,830 2278 21,746 5.45 6.68
988 850 984 AET Aetna 23,958 2646 11,922 6.18 11.86
989 996 174 GLK Great Lakes Chemical 23,981 242 6,967 11.82 8.07
990 994 994 KM Kmart 24,721 2560 19,727 4.82 7.70
991 212 130 RTN.B Raytheon 24,803 2689 26,628 5.26 7.91
992 535 990 UNM UNUM Corporation 25,782 22 13,487 11.71 11.73
993 991 857 HRC HEALTHSOUTH 26,102 2487 12,147 6.02 10.12
994 923 979 ACL ACE Limited 26,233 21,297 9,862 25.08 11.40
995 365 961 WM Washington Mutual 26,591 2730 21,381 9.37 12.87
996 997 996 SPS St. Paul Companies 26,703 21,266 14,277 1.81 10.58
997 86 281 ONE BankOne Corporation 28,857 21,577 45,561 8.47 11.98
998 75 501 FTU First Union Corporation 210,412 21,425 42,965 8.20 11.61
999 1000 527 3VCRIQ Vencor 211,877 21,090 14,896 21.08 6.22
1000 999 1000 LTR Loews Corporation 213,607 22,546 19,948 22.42 9.50
Table 4.4 Common-size Income Statements for Furniture Brands
Table 4.3 Common-size Balance Sheets for Furniture Brands
Chapter 4 Evaluation of Firm Performance 115
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result of the decline in the debt ratio. Net profit declined from 5.4 percent to 5.0
percent of sales, which is consistent with the decline in the operating profit margin.
1. How is the DuPont framework useful?
2. What are common-size statements?
3. What is EVA and how is it different from accounting measures of profitability?
SOURCES OF COMPARATIVE FINANCIAL DATA
An analyst may refer to a number of sources of financial data when preparing a
comparative financial analysis, including the following:
Dun and Bradstreet. Dun and Bradstreet (D&B) prepares a series of 14 key busi-
ness ratios for 800 different lines of business based on the SIC codes (a numeric
industry classification system). The ratios are based on the financial statements of
some 400,000 companies. D&B reports three values for each ratio-the median, the
upper quartile, and the lower quartile. The median is the figure that falls in the mid-
dle when individual ratios of sampled firms are arranged by size. The figure
halfway between the median and the ratio with the highest value is the upper quar-
tile, and the figure halfway between the median and the ratio with the lowest value
is the lower quartile. By reporting three values for each ratio, D&B enables the ana-
lyst to compare a particular firm with the average (median) firm, as well as with
the typical firms in the top and bottom halves of the sample. The D&B publica-
tion containing the data is titled Industry Norms and Key Business Ratios.
Risk Management Association (RMA). This national association of bank loan and
credit officers uses information provided from loan applications to compile 16 ra-
tios for over 250 lines of business based on the SIC codes. Like D&B, RMA reports
the median, upper quartile, and lower quartile for each ratio. Data are presented
for four categories of firm size. This source is especially useful to the analyst gath-
ering information about smaller firms. The RMA publication containing the data
is titled Statement Studies.
Quarterly Financial Report for Manufacturing Companies. The Federal Trade Com-
mission (FTC) and the Securities and Exchange Commission (SEC) cooperate in
publishing quarterly reports on balance sheet and income statement data of vari-
ous manufacturing companies. These include analyses of the firms by industry and
asset size, along with presentations of financial statements in ratio form.
Almanac of Business and Industrial Financial Ratios. This annual almanac of busi-
ness and industrial financial ratios, based on Internal Revenue Service data, re-
ports 22 ratios for many industries. It also includes the number of establishments
in the sampled industry, the number without net income, and the total dollar re-
ceipts for each of the 13 size groups into which firms in each industry are classified.
Financial Studies of Small Business. This annual publication of Financial Research
Associates is particularly valuable for the evaluation of small firms.
Moodys or Standard and Poors Industrial, Financial, Transportation, and Over-the-
Counter Manuals. These contain a large amount of balance sheet and income
statement data, as well as other relevant background information about a firm.
116 Part 1 Introduction
Comprehension Check Questions
http:
Dun and Bradstreet
http://www.dnb.com
Risk Management
Association
http://www.rmahq.org
http:
The Federal Trade Commission
http://www.ftc.gov
The Securities and Exchange
Commission
http://www.sec.gov
http:
Moodys
http://www.moodys.com
Standard and Poors
http://www.
standardandpoors.com
Table 4.5 Sample Industry Data from Thomson ONEBusiness School Edition
Chapter 4 Evaluation of Firm Performance 117
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2. What is the major limitation of the current ratio as a measure of a firms liquid-
ity? How may this limitation be overcome?
3. What problems may be indicated by an average collection period that is sub-
stantially above or below the industry average?
4. What problems may be indicated by an inventory turnover ratio that is sub-
stantially above or below the industry average?
5. What factors limit the use of the fixed asset turnover ratio in comparative
analyses?
6. Why are there separate asset structure ratios for inventory, fixed assets, and ac-
counts receivable?
7. Are higher current, quick, inventory turnover, fixed asset turnover, and total
asset turnover ratios better than lower ones?
8. What are the three most important determinants of a firms return on stock-
holders equity?
9. What specific effects can the use of alternative accounting procedures have on
the validity of comparative financial analyses?
10. What is the relationship between a firms P/E multiple and that firms risk and
growth potential?
11. Discuss the general factors that influence the quality of a companys reported
earnings and its balance sheet.
12. Why would you anticipate a lower P/E ratio for a typical natural gas utility than
for a computer technology firm, such as Dell Computer?
13. According to the DuPont framework, can a firm show a stable ROE pattern de-
spite declining net profit margins and total asset turnovers? Explain.
14. How is Economic Value Added (EVA) different from accounting measures of
profitability?
Self-Test Problems
The following financial data for the Freemont Corporation are to be used in an-
swering the first six self-test problems.
Balance Sheet ($000)
Assets Liabilities & Stockholders Equity
Cash $ 1,500 Accounts payable $12,500
Marketable securities 2,500 Notes payable 12,500
Accounts receivable 15,000 Total current liabilities $25,000
Inventory 33,000 Long-term debt 22,000
Total current assets $52,000 Total liabilities $47,000
Fixed assets (net) 35,000 Common stock (par value) 5,000
Total assets $87,000 Contributed capital in excess of par 18,000
Retained earnings 17,000
Total stockholders equity $40,000
Total liabilities and stockholders equity $87,000
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Problems
1. Vanity Press, Inc. has annual sales of $1,600,000 (assume all sales are on credit)
and a gross profit margin of 35 percent.
a. If the firm wishes to maintain an average collection period of 50 days, what
level of accounts receivable should it carry? (Assume a 365-day year.)
b. The inventory turnover for this industry averages six times. What average
level of inventory should the firm maintain to achieve the same inventory
turnover figure as the industry?
2. Pacific Fixtures lists the following accounts as part of its balance sheet.
Total assets $10,000,000
Accounts payable $ 2,000,000
Notes payable (8%) 1,000,000
Long-term debt (10%) 3,000,000
Common stock at par 1,000,000
Contributed capital in excess of par 500,000
Retained earnings 2,500,000
Total liabilities and stockholders equity $10,000,000
Compute the return on stockholders equity if the company has sales of $20
million and the following net profit margin:
a. 3 percent
b. 5 percent
3. Clovis Industries had sales in 20X1 of $40 million, 20 percent of which were
cash. If Clovis normally carries 45 days of credit sales in accounts receivable,
what are its average accounts receivable balances? (Assume a 365-day year.)
4. Williams Oil Company had a return on stockholders equity of 18 percent dur-
ing 20X1. Its total asset turnover was 1.0 times, and its equity multiplier was 2.0
times. Calculate the companys net profit margin.
5. Using the data in the following table for a number of firms in the same indus-
try, do the following:
a. Compute the total asset turnover, the net profit margin, the equity multi-
plier, and the return on equity for each firm.
b. Evaluate each firms performance by comparing the firms with one an-
other. Which firm or firms appear to be having problems? What corrective
action would you suggest the poorer performing firms take? Finally, what
additional data would you want to have on hand when conducting your
analyses?
Firms
(millions of dollars) A B C D
Sales $20 $10 $15 $25
Net income after tax 3 0.5 2.25 3
Total assets 15 7.5 15 24
Stockholders equity 10 5.0 14 10
124 Part 1 Introduction
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I N T E R M E D I A T E
I N T E R M E D I A T E
I N T E R M E D I A T E 6. Tarheel Furniture Company is planning to establish a wholly owned subsidiary
to manufacture upholstery fabrics. Tarheel expects to earn $1 million after
taxes on the venture during the first year. The president of Tarheel wants to
know what the subsidiarys balance sheet would look like. The president be-
lieves that it would be advisable to begin the new venture with ratios that are
similar to the industry average.
Tarheel plans to make all sales on credit. All calculations assume a 365-day
year. In your computations, you should round all numbers to the nearest
$1,000. Based upon the industry average financial ratios presented here, com-
plete the projected balance sheet for Tarheels upholstery subsidiary.
Industry Averages
Current ratio 2:1
Quick ratio 1:1
Net profit margin ratio 5 percent
Average collection period 20 days
Debt ratio 40 percent
Total asset ratio 2 times
Forecasted Upholstery Subsidiary Balance Sheet
Cash _______ Total current liabilities _______
Accounts receivable _______ Long-term debt _______
Inventory _______ Total debt _______
Total current assets _______ Stockholders equity _______
Net fixed assets _______ Total liabilities and
Total assets _______ stockholders equity _______
7. The Jamesway Printing Corporation has current assets of $3.0 million. Of this
total, $1.0 million is inventory, $0.5 million is cash, $1.0 million is accounts re-
ceivable, and the balance is marketable securities. Jamesway has $1.5 million
in current liabilities.
a. What are the current and the quick ratios for Jamesway?
b. If Jamesway takes $0.25 million in cash and pays off $0.25 million of current
liabilities, what happens to its current and quick ratios? What happens to
its real liquidity?
c. If Jamesway sells $0.5 million of its accounts receivable to a factor (a type of
specialized financial institution that buys accounts receivable; for details
see Chapter 17) and uses the proceeds to pay off short-term debt obliga-
tions, what happens to its current and quick ratios?
d. If Jamesway sells $1.0 million in new stock and places the proceeds in mar-
ketable securities, what happens to its current and quick ratios?
e. What do these examples illustrate about the current and quick ratios?
8. Gulf Controls, Inc., has a net profit margin of 10 percent and earnings after
taxes of $600,000. Its current balance sheet follows:
Current assets $1,800,000 Current liabilities $ 600,000
Fixed assets 2,200,000 Long-term debt 1,000,000
Total assets $4,000,000 Common stock 500,000
Retained earnings 1,900,000
Total liabilities and stockholders equity $4,000,000
Chapter 4 Evaluation of Firm Performance 125
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C H A L L E N G E
I N T E R M E D I A T E
a. Evaluate the liquidity position of Jackson relative to that of the average firm
in the industry. Consider the current ratio, the quick ratio, and the net
working capital (current assets minus current liabilities) for Jackson. What
problems, if any, are suggested by this analysis?
b. Evaluate Jacksons performance by looking at key asset management ratios.
Are any problems apparent from this analysis?
c. Evaluate the financial risk of Jackson by examining its times interest
earned ratio and its equity multiplier ratio relative to the same industry
average ratios.
d. Evaluate the profitability of Jackson relative to that of the average firm in
its industry.
e. Give an overall evaluation of the performance of Jackson relative to other
firms in its industry.
f. Perform a DuPont analysis on ROI and ROE for Jackson. What areas ap-
pear to have the greatest need for improvement?
g. Jacksons current P/E ratio is 7 times. What factor(s) are most likely to ac-
count for this ratio relative to the higher industry average ratio?
10. Given the following data for Profiteers, Inc., and the corresponding industry
averages, perform a trend analysis of the return on investment and the return
on stockholders equity. Plot the data and discuss any trends that are apparent.
Also, discuss the underlying causes of these trends.
Years 20X1 20X2 20X3 20X4 20X5
Profiteers, Inc.
Net profit margin 14% 12% 11% 9% 10%
Asset turnover 1.26x 1.22x 1.20x 1.19x 1.21x
Equity multiplier 1.34x 1.40x 1.61x 1.65x 1.63x
Years 20X1 20X2 20X3 20X4 20X5
Industry Averages
Net profit margin 12% 11% 11% 10% 10%
Asset turnover 1.25x 1.27x 1.30x 1.31x 1.34x
Equity multiplier 1.42x 1.45x 1.47x 1.51x 1.53x
11. If a company sells additional common stock and uses the proceeds to increase
its inventory level and to increase its cash balances, what is the near-term (im-
mediate) impact (increase, decrease, no change) of this transaction on the fol-
lowing ratios?
a. Current ratio
b. Return on stockholders equity
c. Quick ratio
d. Debt to total assets
e. Total asset turnover
Chapter 4 Evaluation of Firm Performance 127
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I N T E R M E D I A T E
I N T E R M E D I A T E
B A S I C
12. Keystone Resources has a net profit margin of 8 percent and earnings after
taxes of $2 million. Its current balance sheet is as follows:
Current assets $ 6,000,000 Current liabilities $ 3,500,000
Fixed assets 10,000,000 Long-term debt 5,500,000
Total assets $16,000,000 Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and stockholders equity $16,000,000
a. Calculate Keystones return on stockholders equity.
b. Industry average ratios are
Net profit margin 10%
Total asset turnover 2.0 times
Equity multiplier 1.5 times
What does a comparison of Keystone to these averages indicate about the
firms strengths and weaknesses?
c. Keystone has inventories of $3.2 million. Compute the firms quick ratio.
13. The stock of Jenkins Corporation, a major steel producer, currently is selling
for $50 per share. The book value per share is $125. In contrast, the price per
share of Dataquests stock is $40, compared to a book value per share of $10.
Dataquest, a leading software developer, has a copyright on the best-selling
database management program. Why do these two firms have such dramati-
cally different market-to-book ratios?
14. Fill in the balance sheet for the Jamestown Company presented below based
on the following data (assume a 365-day year):
Sales $3,650,000
Total asset turnover 4x
Current ratio 3:1
Quick ratio 2:1
Current liabilities to stockholders equity 30%
Average collection period 20 days
Total debt to total assets 0.4
Balance Sheet
Cash _______ Accounts payable _______
Accounts receivable _______ Total current liabilities _______
Inventory _______ Long-term debt _______
Total current assets _______ Stockholders equity _______
Fixed assets _______
Total assets _______ Total liabilities and equity _______
128 Part 1 Introduction
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I N T E R M E D I A T E
B A S I C
15. The Southwick Company has the following balance sheet ($000):
Assets Liabilities & Stockholders Equity
Cash $ 500 Accounts payable $ 1,750
Marketable securities 750 Notes payable 1,250
Accounts receivable 2,000 Total current liabilities $ 3,000
Inventory 2,500 Long-term debt 1,750
Total current assets $ 5,750 Total liabilities $ 4,750
Plant and equipment (net) 5,000 Common stock ($1 par) 1,000
Total assets $10,750 Contributed capital in excess of par 2,000
Retained earnings 3,000
Total stockholders equity $ 6,000
Total liabilities and
stockholders equity $10,750
Financial Ratios
Current ratio 1.92
Quick ratio 1.08
Debt-to-equity ratio 0.79
Evaluate the impact of each of the following (independent) financial decisions
on Southwicks current, quick, and debt-to-equity ratios:
a. The firm reduces its inventories by $500,000 through more efficient inventory
management procedures and invests the proceeds in marketable securities.
b. The firm decides to purchase 20 new delivery trucks for a total of $500,000
and pays for them by selling marketable securities.
c. The firm borrows $500,000 from its bank through a short-term loan (sea-
sonal financing) and invests the proceeds in inventory.
d. Southwick borrows $2,000,000 from its bank through a 5-year loan (inter-
est due annually, principal due at maturity) and uses the proceeds to ex-
pand its plant.
e. The firm sells $2,000,000 (net) in common stock and uses the proceeds to
expand its plant.
16. Armbrust Corporation is the maker of fine fitness equipment. Armbrusts
bank has been pressuring the firm to improve its liquidity. Which of the follow-
ing actions proposed by the CFO do you believe will actually achieve this ob-
jective? Why or why not?
a. Sell new equity and use the proceeds to purchase a new plant site.
b. Use cash and marketable securities to pay off short-term bank borrowings
and accounts payable.
c. Borrow long-term and use the proceeds to pay off short-term debt.
d. Sell surplus fixed assets and invest the proceeds in marketable securities.
17. From Stern Stewarts Web site (http://www.sternstewart.com) identify the five
best performing firms in terms of EVAs and the five worst performing firms.
Do the same with MVAs.
Chapter 4 Evaluation of Firm Performance 129
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