Chapter 14

Suggestions for Case

Analysis

Case Analysis
Research:
Annual reports
10K form
Income statements
Balance sheets
Cash flow statements
Economic conditions
Industry information

Case Analysis

Resources for Case Library Research:

Company Information:
Moodys Manuals on Investment
Standard & Poors Register of
Corporations, Directors, and Executives
Value Lines Investment Survey
Findex: The Directory of Market Research
Reports, Studies and Surveys

Case Analysis
Resources for Case Library Research:
Economic Information:

Business Cycle Development

U.S. Census Bureau
Current Business Reports
Economic Indicators
Long-Term Economic Growth
Monthly Labor Review
U.S. Industrial Outlook
Overseas Business Reports

Case Analysis
Resources for Case Library Research:
Industry Information:

Business Week
Fortune
Industry Survey
Industry Week
Forbes
Inc.

Case Analysis
Resources for Case Library Research:
Directory and Index Information:

Business Periodical Index

Directory of National Trade Associations
Encyclopedia of Associations
Funk and Scotts Index of Corporations
and Industries
Thomass Register of American
Manufacturers
Wall Street Journal Index

Case Analysis

Resources for Case Library Research:

Ratio Analysis Information:
Almanac of Business and Industrial
Financial Ratios
Annual Statement Studies
Duns Review
Industry Norms and Key Business Ratios

Case Analysis
Resources for Case Library Research:
Online Information:

www.hoovers.com
www.sec.gov
www.pathfinder.com
www.dbisna.com/dnb/dnbhome.htm
www.fuld.com
www.economist.com
www.w100.com
www.bloomberg.com

Case Analysis
Financial Analysis:
Ratio analysis
Liquidity ratios- examines firm cash
generation levels & cash convertibility
Profitability ratios- show extent to which
firm activities generate profits
Activity ratios- explores cycles of cash
and product turnover in firms
Leverage ratios- demonstrates firm debt
levels & interest responsibilities

Financial Ratio Analysis Liquidity

Formula
1. Liquidity Ratios
Current ratio

Quick (acid test) ratio

Inventory to net
working capital

Cash ratio

How
Expressed

Meaning

Current assets

Current liabilities

Decimal

A short-term indicator of the companys

ability to pay its short-term liabilities
from short-term assets; how much of
current assets are available to cover
each dollar of current liabilities.

Current assets Inventory

Current liabilities

Decimal

Measures the companys ability to pay

off its short-term obligations from
current assets, excluding inventories.

Inventory

Current assets Current liabilities

Decimal

A measure of inventory balance;

measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.

Cash + Cash equivalents

Current liabilities

Decimal

Measures the extent to which the

companys capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.

Financial Ratio Analysis

Profitability
Formula
2. Profitability Ratios
Net profit margin
Gross profit margin

Return on investment
(ROI)

Return on equity
(ROE)
Earnings per share
(EPS)

How
Expressed

Meaning

Net profit after taxes

Net sales

Percentage

Shows how much after-tax profits are

generated by each dollar of sales.

Sales Cost of goods sold

Net sales

Percentage

Net profit after taxes

Total assets

Indicates the total margin available to

cover other expenses beyond cost of
goods sold, and still yield a profit.

Percentage

Measures the rate of return on the total

assets utilized in the company; a
measure of managements efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.

Net profit after taxes

Shareholders equity

Percentage

Net profit after taxes

preferred stock dividends

Average number of
common shares

Measures the rate of return on the

book value of shareholders total
investment in the company.

Dollars per
share

Shows the after-tax earnings

generated for each share of common
stock.

Financial Ratio Analysis Activity

Formula
3. Activity Ratios
Inventory turnover

Net sales

Inventory

Days of inventory

Inventory

Cost of goods sold 365

Net working capital

turnover
Asset turnover

Fixed asset turnover

Average collection
period

Accounts receivable
turnover
Accounts payable
period
Days of cash

Net sales

Net working capital

How
Expressed

Decimal

Days
Decimal

Sales

Total assets

Decimal

Sales

Fixed assets

Decimal

Accounts receivable

Sales for year 365

Days

Annual credit sales

Accounts receivable

Decimal

Accounts payable

Purchases for year 365

Cash

Net sales for year 365

Days
Days

Meaning

Measures the number of times that average inventory of

finished goods was turned over or sold during a period of
time, usually a year.
Measures the number of one days worth of inventory that
a company has on hand at any given time.
Measures how effectively the net working capital is used
to generate sales.
Measures the utilization of all the companys assets;
measures how many sales are generated by each dollar
of assets.
Measures the utilization of the companys fixed assets
(i.e., plant and equipment); measures how many sales
are generated by each dollar of fixed assets.
Indicates the average length of time in days that a
company must wait to collect a sale after making it; may
be compared to the credit terms offered by the company
to its customers.
Indicates the number of times that accounts receivable
are cycled during the period (usually a year).
Indicates the average length of time in days that the
company takes to pay its credit purchases.
Indicates the number of days of cash on hand, at present
sales levels.

Financial Ratio Analysis Leverage

Formula

How
Expressed

Meaning

4. Leverage Ratios
Debt to asset ratio

Total debt

Total assets

Percentage

Measures the extent to which borrowed

funds have been used to finance the
companys assets.

Debt to equity ratio

Total debt

Shareholders equity

Percentage

Measures the funds provided by creditors

versus the funds provided by owners.

Long-term debt to
capital structure

Long-term debt

Shareholders equity

Percentage

Measures the long-term component of

capital structure.

Profit before taxes + Interest charges

Interest charges

Decimal

Indicates the ability of the company to

meet its annual interest costs.

Profit before taxes +

Interest charges + Lease charges

Interest charges + Lease obligations

Decimal

A measure of the companys ability to

meet all of its fixed-charge obligations.

Percentage

Measures the short-term financing

portion versus that provided by owners.

Times interest earned

Coverage of fixed
charges
Current liabilities to
equity

Current liabilities

Shareholders equity

Financial Ratio Analysis Other

Formula
5. Other Ratios
Price/earning ratio

Dividend payout ratio

Dividend yield on
common stock

Market price per share

Earnings per share

How
Expressed

Meaning

Decimal

Shows the current markets evaluation

of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.

Annual dividends per share

Annual earnings per share

Percentage

Indicates the percentage of profit that

is paid out as dividends.

Annual dividends per share

Current market price per share

Percentage

Indicates the dividend rate of return to

common shareholders at the current
market price.

Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for
the particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanks
to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, for
his definitions of these ratios.

Case Analysis
Analyzing Financial Statements:
Scrutinize historical statements
Compare historical statements over
time
Calculate changes in categories from
year to year
Determine the change as a percentage
Adjust for inflation

Case Analysis
Analyzing Financial Statements (cont.):
Use Financial Statements To:
Compare historical statements of one
firm over time (explore trends)
Examine performance relative to direct
competitors
Examine performance relative to
industry averages

Case Analysis
Economic Measures:
Constant dollars
Dollars adjusted for inflation to make them
comparable over various years.
CPI

Prime interest rate

Rate of interest banks charge on their lowest risk
loans.

Gross Domestic Product (GDP)

Total output of goods and services within a
countrys borders.

Strategic Audit Worksheet: Part 1

Strategic Audit Heading

Analysis
(+) Factors

I. Current Situation
A. Past Corporate Performance Indexes
B. Strategic Posture
Current Mission
Current Objectives
Current Strategies
Current Policies

SW OT Analysis Begins:
II. Corporate Governance
A. Board of Directors
B. Top Management

III. External Environment (EFAS):

Opportunities and Threats(SW OT)
A. Societal Environment
B. Task Environment Industry Analysis

IV. Internal Environment (IFAS):

Strengths and Weaknesses(SWOT)
A. Corporate Structure
B. Corporate Culture
C. Corporate Resources

(-) Factors

Com m ents

Strategic Audit Worksheet: Part 2

S trategic Aud it Heading

Analysis
(+) Factors

1. M arketing
2. Finance
3. Research and Developm ent
4. Operations and Logistics
5. Hum an Resources
6. Inform ation System s

V. Analysis of Strategic Factors

(SFAS)
A.

Key Internal and External

Strategic Factors (SW OT)
B. Review of Mission and Objectives

SW OT Analysis Ends. Recom m endation Begins:

V I. Alternatives and Recom m endations
A. Strategic Alternatives
B. Recomm ended Strategy

V II. Im ple m entation

V III. E valuation and C ontrol

(-) Factors

C om m ents

Case Analysis

Case Analysis Method:

Read case
Read case with strategic audit
Begin SWOT analysis
EFAS
IFAS

Case Analysis

Case Analysis Method:

Write Strategic Audit
Parts I IV

Write Strategic Audit

Part V
SFAS

Case Analysis

Write Strategic Audit

Part VI
Alternatives
Recommendations

Write Strategic Audit

Part VII
Implementation

Write Strategic Audit

Part VIII
Evaluation & Control

14.1a Financial Ratio Analysis Liquidity (Table 14.1)

Financial Ratio Analysis Liquidity

How
Expressed

Formula
1. Liquidity Ratios

Current assets

Current liabilities

Decimal

A short-term indicator of the companys

ability to pay its short-term liabilities
from short-term assets; how much of
current assets are available to cover
each dollar of current liabilities.

Current assets Inventory

Current liabilities

Decimal

Measures the companys ability to pay

off its short-term obligations from
current assets, excluding inventories.

Inventory

Current assets Current liabilities

Decimal

A measure of inventory balance;

measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.

Cash + Cash equivalents

Current liabilities

Decimal

Measures the extent to which the

companys capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.

Current ratio

Quick (acid test) ratio

Inventory to net
working capital

Meaning

Cash ratio

Prentice Hall,
2000Prentice Hall,

Chapter 14Chapter 14
Wheelen/Hunger

196

14.1b Financial Ratio Analysis Profitability (Table 14.1)

Financial Ratio Analysis

Profitability
How
Expressed

Formula

2. Profitability Ratios
Net profit margin
Gross profit margin

Return on investment
(ROI)

Return on equity
(ROE)
Earnings per share
(EPS)

Prentice Hall,
2000Prentice Hall,

Meaning

Net profit after taxes

Net sales

Percentage

Shows how much after-tax profits are

generated by each dollar of sales.

Sales Cost of goods sold

Net sales

Percentage

Net profit after taxes

Total assets

Indicates the total margin available to

cover other expenses beyond cost of
goods sold, and still yield a profit.

Percentage

Measures the rate of return on the total

assets utilized in the company; a
measure of managements efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.

Net profit after taxes

Shareholders equity

Percentage

Net profit after taxes

preferred stock dividends

Average number of
common shares

Measures the rate of return on the

book value of shareholders total
investment in the company.

Dollars per
share

Shows the after-tax earnings

generated for each share of common
stock.

Chapter 14Chapter 14
Wheelen/Hunger

197

14.1c Financial Ratio Analysis Activity (Table 14.1)

Financial Ratio Analysis Activity

How
Expressed

Formula
3. Activity Ratios
Inventory turnover

Net sales

Inventory

Days of inventory

Inventory

Cost of goods sold 365

Net working capital

turnover
Asset turnover

Fixed asset turnover

Average collection
period

Accounts receivable
turnover
Accounts payable
period
Days of cash

Prentice Hall,
2000Prentice Hall,

Decimal

Net sales

Net working capital

Days
Decimal

Sales

Total assets

Decimal

Sales

Fixed assets

Decimal

Accounts receivable

Sales for year 365

Days

Annual credit sales

Accounts receivable

Decimal

Accounts payable

Purchases for year 365

Cash

Net sales for year 365

Days
Days

Chapter 14Chapter 14
Wheelen/Hunger

Meaning

Measures the number of times that average inventory of

finished goods was turned over or sold during a period of
time, usually a year.
Measures the number of one days worth of inventory that
a company has on hand at any given time.
Measures how effectively the net working capital is used
to generate sales.
Measures the utilization of all the companys assets;
measures how many sales are generated by each dollar
of assets.
Measures the utilization of the companys fixed assets
(i.e., plant and equipment); measures how many sales
are generated by each dollar of fixed assets.
Indicates the average length of time in days that a
company must wait to collect a sale after making it; may
be compared to the credit terms offered by the company
to its customers.
Indicates the number of times that accounts receivable
are cycled during the period (usually a year).
Indicates the average length of time in days that the
company takes to pay its credit purchases.
Indicates the number of days of cash on hand, at present
sales levels.

198

14.1d Financial Ratio Leverage (Table 14.1)

Financial Ratio Analysis Leverage

How
Expressed

Formula

Meaning

4. Leverage Ratios
Total debt

Total assets

Debt to asset ratio

Percentage

Measures the extent to which borrowed

funds have been used to finance the
companys assets.

Debt to equity ratio

Total debt

Shareholders equity

Percentage

Measures the funds provided by creditors

versus the funds provided by owners.

Long-term debt to
capital structure

Long-term debt

Shareholders equity

Percentage

Measures the long-term component of

capital structure.

Profit before taxes + Interest charges

Interest charges

Decimal

Indicates the ability of the company to

meet its annual interest costs.

Profit before taxes +

Interest charges + Lease charges

Interest charges + Lease obligations

Decimal

A measure of the companys ability to

meet all of its fixed-charge obligations.

Percentage

Measures the short-term financing

portion versus that provided by owners.

Times interest earned

Coverage of fixed
charges
Current liabilities to
equity

Prentice Hall,
2000Prentice Hall,

Current liabilities

Shareholders equity

Chapter 14Chapter 14
Wheelen/Hunger

199

14.1e Financial Ratio Analysis Other (Table 14.1 )

Financial Ratio Analysis Other

How
Expressed

Formula
5. Other Ratios

Market price per share

Earnings per share

Decimal

Shows the current markets evaluation

of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.

Annual dividends per share

Annual earnings per share

Percentage

Indicates the percentage of profit that

is paid out as dividends.

Annual dividends per share

Current market price per share

Percentage

Indicates the dividend rate of return to

common shareholders at the current
market price.

Price/earning ratio

Dividend payout ratio

Dividend yield on
common stock

Meaning

Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for
the particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanks
to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, for
his definitions of these ratios.

Prentice Hall,
2000Prentice Hall,

Chapter 14Chapter 14
Wheelen/Hunger

200