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ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS Himanshu Puri Assistant Professor IILM
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Financial Statement Analysis
What is financial statement analysis? “Tearing apart” the financial statements and looking at the relationships
It looks at accounting information from users’ perspective
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Financial Statement Analysis Who analyzes financial statements? Internal users (i.e., management) External users
Examples? Investors, creditors, regulatory agencies & … stock market analysts and auditors
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Financial Statement Analysis
What do internal users use it for? Planning, evaluating and controlling company operations
What do external users use it for? Assessing past performance and current financial position and making predictions about the future profitability and solvency of the company as well as evaluating the effectiveness of management
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Financial Statement Analysis Information is available from
627 628
Published annual reports (1)
Financial statements
(2) (3) (4) (5)
Notes to financial statements Letters to stockholders Auditor’s report (Independent accountants) Management’s discussion and analysis
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Financial Statement Analysis Information is available from
627 628
Other sources (1)
Newspapers (e.g., Wall Stre et Jo urn al )
(2) Periodicals (e.g. Forbes, Fortun e ) (3) Financial information organizations such as: Moody’s, Standard & Poor’s, Dun & Bradstreet, Inc., and Robert Morris Associates (4) Other business publications
Methods of Financial Statement Analysis
Horizontal Analysis (Comparative Statements)
Vertical Analysis (Common-Size Statements)
Trend Percentages
Ratio Analysis
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Horizontal Analysis Using co m p ara tive financ ia l statements to calculate dollar or percentage changes in a financial statement item from one period to the next
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Vertical Analysis For a single financial statement, each item ispercentage expressedof asaa significant total, e.g., all income statement items are expressed as a percentage of sales
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Common-Size Statements Financial statements that show only percentages and no absolute dollar amounts
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Trend Percentages Show changes over time in given financial statement items (can help evaluate financial information of several years)
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Ratio Analysis Expression of logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income)
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Horizontal Analysis Example The management of Clover Company provides you with comparative balance sheets of the years ended December 31, 1999 and 1998. Management asks you to prepare a horizontal analysis on the information.
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CLOVER CORPORATION Comparative Bal ance Shee ts Dece mbe r 31, 1999 a nd 1998 1999
1998
Assets Current assets: C
a sh Accountsre ce i va bl e , ne t
$
12, 000 $ 60, 000
23,500 40,000
I nve ntory
80, 000
P re pa i de x pe nse s
3, 000
1,200
155, 000
164,700
Tota lcurre nta sse ts
100,000
Property and equipment: L
a nd Bui l di ngs a nd e qui pm e nt, ne t Tota l prope rty a nd e qui pm e nt Totaal sse ts
40, 000
40,000
120, 000
85,000
160, 000
125,000
$ 315, 000
$
289,700
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Horizontal Analysis Example Calculating Change in Dollar Amounts Dollar Change
Current Year =
Figure
Base Year –
Figure
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Horizontal Analysis Example Calculating Change in Dollar Amounts Dollar Change
Current Year =
Figure
Base Year –
Figure
Since we are measuring the amount of the change between 1998 and 1999, the dollar amounts for 1998 become the “base” year figures.
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Horizontal Analysis Example Calculating Change as a Percentage Percentage Change
Dollar Change =
Base Year Figure
×
100%
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Horizontal Analysis Example CLOVER CORPORATION Comparative Bala nce Sheets December 31, 1999 and 1998 1999
1998
Increase (Decrea se) Amount %
Assets C Current a sassets: h $ 12,00$0 23,500 $ (11,500) Accountsre ce iva ble ,ne t 60,000 40,000 Inve ntory 80,000 100,000 Pre pa ide x pe nse s 3,000 1,200 Tota lcurre nta sse ts 155,000 164,700 $12,000 – $23,500 = $(11,500) Property and equipment: L a nd 40,000 40,000 Buildingsa nd e quipme nt, ne t 120,000 85,000 Tota l prope rty a nd e quipme nt 160,000 125,000 Totaal sse ts $ 315,000 $ 289,700
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Horizontal Analysis Example CLOVER CORPORATION Comparative Bala nce Sheets December 31, 1999 and 1998 1999
1998
Increase (Decrea se) Amount %
Assets C Current a sassets: h Accountsre ce iva ble ,ne t Inve ntory Pre pa ide x pe nse s Tota lcurre nta sse ts Property and equipment: L a nd Buildingsa nd e quipme nt, ne t Tota l prope rty a nd e quipme nt Totaal sse ts
$
12,00$0 60,000 80,000 3,000 155,000
23,500 $ (11,500) 40,000 100,000 1,200 164,700
(48.9)
($11,500 ÷ $23,500) × 100% = 48.9% 40,000 120,000 160,000 $ 315,000 $
40,000 85,000 125,000 289,700
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Horizontal Analysis Example CLOVER CORPORATION Comparative Bala nce Sheets December 31, 1999 and 1998 1999
1998
Increase (Decrea se) Amount %
Assets C Current a sassets: h Accountsre ce iva ble ,ne t I nve ntory Pre pa ide x pe nse s Tota lcurre nta sse ts Property and equipment: L a nd Buildingsa nd e quipme nt, ne t Tota l prope rty a nd e quipme nt Totaal sse ts
$
12,00$0 60,000 80,000 3,000 155,000
40,000 120,000 160,000 $ 315,000 $
23,500 $ (11,500) 40,000 20,000 100,000 (20,000) 1,200 1,800 164,700 (9,700) 40,000 85,000 125,000 289,700 $
35,000 35,000 25,300
(48.9) 50.0 (20.0) 150.0 (5.9) 0.0 41.2 28.0 8.7
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Horizontal Analysis Example Let’s apply the same procedures to the liability and stockholders’ equity sections of the
balance sheet.
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CLOVER CORPORATION Comparative Balance Shee ts December 31, 1999 and 1998 1999 Liabilities and Stockholders' Equity Current li abil ities: Accountspa ya ble Notepsa ya ble Tota lcurre ntlia bili ti e s Long-term lia bilitie s: Bondspa ya bl e8 ,% Tota l ia bilitie s Stockholders' e quity: P re fe rre dstock Com m os ntock Additi ona lpa id-inca pita l Tota lpa i d-inca pi ta l Re ta i ne de a rni ngs Tota l stockholde rs'e quity Total l iab ilities an d stockhold er s' eq uity
$ 67,000 3,000 70,000
1998
$
75,000 145,000 20,000 60,000 10,000 90,000 80,000 170,000 $ 315,000
$
Increase (Decrease) Am ount %
44,000 $ 6,000 50,000
23,000 (3,000) 20,000
52.3 (50.0) 40.0
80,000 130,000
(5,000) 15,000
(6.3) 11.5
20,000 60,000 10,000 90,000 69,700 159,700 289,700 $
10,300 10,300 25,300
0.0 0.0 0.0 0.0 14.8 6.4 8.7
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Horizontal Analysis Example Now, let’s apply the procedures to the income statement.
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CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 1999 and 1998 Increase (Decrease) 1999 1998 Am ount % Nesta l e s $ 520, 000 $ 480,000 $ 40,000 8.3 Costofgoodssol d 360, 000 315,000 45,000 14.3 Grossm a rgi n Ope ra ti ng e x pe nse s Ne t ope ra ti ng i ncom e I nte re ste x pe nse Ne t i ncom e be fore ta x e s Le ssi ncom e ta x e s (30%) Neitncom e
160, 000 128, 600 31, 400 6, 400 25, 000 7, 500 $ 17, 500
165,000 126,000 39,000 7,000 32,000 9,600 $ 22,400
$
(5,000) 2,600 (7,600) (600) (7,000) (2,100) (4,900)
(3.0) 2.1 (19.5) (8.6) (21.9) (21.9) (21.9)
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CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 1999 and 1998 Increase (Decrease) 1999 1998 Am ount % Nesta l e s $ 520, 000 $ 480,000 $ 40,000 8.3 Costofgoodssol d 360, 000 315,000 45,000 14.3 Grossm a rgi n 160, 000 165,000 Ope ra ti ng e x pe nse s 128, 600 126,000 Ne t ope ra ti ng i ncom e 31, 400 39,000 I nte re ste x pe nSales se , 408.3% 0 7,000 increased 6by w hile net Ne t i ncom e be fore ta x e s 25, 000 32,000 income decreased by 21.9%. Le ssi ncom e ta x e s (30%) 7, 500 9,600 Neitncom e $ 17, 500 $ 22,400 $
(5,000) 2,600 (7,600) (600) (7,000) (2,100) (4,900)
(3.0) 2.1 (19.5) (8.6) (21.9) (21.9) (21.9)
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There were increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the CLOVER CORPORATION Income increase inComparative sales, yielding anStatements overall Fordecrease the Years Ended in netDecember income.31, 1999 and 1998 Nesta l e s Costofgoodssol d
1999 $ 520, 000 360, 000
Increase (Decrease) 1998 Am ount % $ 480,000 $ 40,000 8.3 315,000 45,000 14.3
Grossm a rgi n Ope ra ti ng e x pe nse s Ne t ope ra ti ng i ncom e I nte re ste x pe nse Ne t i ncom e be fore ta x e s Le ssi ncom e ta x e s (30%) Neitncom e
160, 000 128, 600 31, 400 6, 400 25, 000 7, 500 $ 17, 500
165,000 126,000 39,000 7,000 32,000 9,600 $ 22,400
$
(5,000) 2,600 (7,600) (600) (7,000) (2,100) (4,900)
(3.0) 2.1 (19.5) (8.6) (21.9) (21.9) (21.9)
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Vertical Analysis Example The management of Sample Company asks you to prepare a vertical analysis for the comparative balance sheets of the company.
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Vertical Analysis Example Sam ple Co mpany Balance Sheet (Assets) At December 31, 1999 and 1998 % of Total Assets Ca sh Accts. Re c. I nve ntory La nd Equi pm e nt Accum . De pr. T ota l
1999 82, 000 120, 000 87, 000 101, 000 110, 000 (17, 000) $ 483, 000 $
1998 1999 30,000 17% 100,000 5% 26%2 82,000 8% 21%1 90,000 1% 23%2 100,000 3% 26%2 (15,000) 4% -4%$ 387,000 100% $
1998 8%
100%
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Vertical Analysis Example Sam ple Co mpany Balance Sheet (Assets) At December 31, 1999 and 1998 % of Total Assets 1999 1998 1999 1998 Ca sh $ 82, 000 $ 30,000 17% 8% Accts. Re c. 120, 000 100,000 5% 26%2 I nve ntory 87, 000 82,000 8% 21%1 $82,000 ÷ $483,000 = 17% rounded La nd 101, 000 90,000 1% 23%2 $30,000 ÷ $387,000 = 8% rounded Equi pm e nt 110, 000 100,000 3% 26%2 Accum . De pr. (17, 000) (15,000) 4% -4%T ota l $ 483, 000 $ 387,000 100% 100%
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Vertical Analysis Example Sample Company Balance Sheet (Liabilities & Stockholders' Equity) At December 31, 1999 and 1998 % of Total Assets 1999 1998 1999 Acts. P a ya bl e $ 76, 000 $ 60,000 16% W a ge sP a ya bl e 33, 000 17,000 % 4% 7 Note sP a ya$76,000 bl e 50, 000 0% 13% 1 ÷ $483,000 = 50,000 16% rounded Com m on Stock 170, 000 160,000 5% 41% 3 Re ta i ne d Ea rni ngs 154, 000 100,000 2% 26% 3 T ota l $ 483, 000 $ 387,000 100%
1998 16%
100%
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Trend Percentages Example Wheeler, Inc. provides you with the following operating data and asks that you prepare a trend analysis.
Re ve nue s Ex pe nse s Ne tincome
1999 $ 2,405 2,033 $ 372
Wheeler, Inc. Operating Data 1998 1997 $ 2,244 $ 2,112 1,966 1,870 $ 278 $ 242
1996 $ 1,991 1,803 $ 188
1995 $ 1,820 1,701 $ 119
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Trend Percentages Example Wheeler, Inc. provides you with the following operating data and asks that you prepare a trend analysis.
Re ve nue s Ex pe nse s Ne tincome
1999 $ 2,405 2,033 $ 372
Wheeler, Inc. Operating Data 1998 1997 $ 2,244 $ 2,112 1,966 1,870 $ 278 $ 242
1996 $ 1,991 1,803 $ 188
1995 $ 1,820 1,701 $ 119
$1,991 - $1,820 = $171
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Trend Percentages Example Using 1995 as the base year, we develop the following percentage relationships. Wheeler, Inc.
Re ve nue s Ex pe nse s Ne tincome
1999 132% 120% 313%
Operating Data 1998 1997 123% 116% 116% 110% 234% 203%
1996 109% 106% 158%
1995 100% 100% 100%
$1,991 - $1,820 = $171 $171 ÷ $1,820 = 9% rounded
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140
Trend line for Sales
130
e s a B 120 0 0 1 f 110 o %
100 90 Sales Expenses
1995
1996
1997
Ye ar s
1998
1999
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Use of Fin an c ia l Ra tios A Finan cial Ratio is an index that relates two a ccou nting numbers and is
obtained by dividing one number by the other.
Typ es of Comparisons
Internal Comparisons External Comparisons
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Exte rnal Com par iso n s a nd Sou rce s o f I nd u stry Ra ti o s This involves comparing the ratios of one firm with those of similar firms or with industry averages. is important as one should compare “apples to apples.”
Similarity
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Basket Wonders’ Balance Sh eet ( A s s et Sid e) Basket Wonders Balance Sheet (thousands) Dec. 31, 200 7a
Cash $ 90 c Acct. Rec. 394 Inventories 696 Bank 5 STerm Loan 10 d Current Assets $1,195 Fixed Assets (@Cost)e 1030 Less: Acc. Depr. f (329) Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223 Total Assets b $2,169
a. How the firm sta nd s on a sp ecific d ate . b. What BW ow ned. c. Am ounts owed by customers. d. Ca sh /likely co nv ertible to c ash w ithin 1 yea r. e. Original amo un t paid. f. Ac c. deduction s for w ea r and tea r.
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Basket Wonders’ Balance Sh eet ( L ia b ility Sid e) Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
Notes Payable $ 290 c Acct. Payable 94 d O/STaxes 16 Other
Accrued Liab. d 100 Current Liab. e $ 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock ($1 par) g 200 g Add Pd in Capital 729 h Retained Earnings 210 Total Equity $1,139 a,b Total Liab/Equity $2,169
a. Note, A ss ets = Liabilitie s + Equ ity. b. What BW owed and c. d. e. f. g. h.
ow ner ship position. Owed to sup plie rs for goo ds and s er vices. Unpaid w ages, salaries , etc. Debts p ayab le < 1 y ear. Debts p ayab le > 1 year. Origin al inv estm ent. Ea rnin gs reinvested.
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Basket Wonders’ In c o m e Sta te m en t Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007a Net Sales $ 2,211 Cost of Goods Sold b 1,599
a. Me asures pro fitability ov er a tim e peri od .
Gross Profit SG&A Expenses c EBITd Interest Expensee EBT f Income Taxes EATg Cash Dividends Increase in RE
b. Received, or receivable, from c ustom ers. c. Sale s co m m ., adv ., officers’ salaries, etc. d. Operati ng inc om e. e. Cost of bo rrow ed fund s. f. Ta xab le inc om e. g. Am ou nt earned for shareholders.
$ $ $ $
$
612 402 210 59 151 60 91 38 53
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Liq u idit y Ra ti o s Balance Sheet Ratios Liquidity Ratios
Shows a firm’s ability to cover its current liabilities with its current assets.
Current
Current Assets Current Liabilities For Basket Wonders December 31, 2007 $1,195 = 2.39 $500
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Liq uid it y Rati o Comparisons
Current Ratio Year
BW
2007 2006 2005
2.39 2.26 1.91
Industry
2.15 2.09 2.01
Ratio is stronger than the industry average.
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L iqu idit y Ra ti os Balance Sheet Ratios Liquidity Ratios
Shows a firm’s ability to meet current liabilities with its most liquid assets.
A cid -Te st ( Quic k)
Current Assets - Inv Current Liabilities For Basket Wonders December 31, 2007 $1,195 – $696 = 1.00 $500
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L iqu idity Ra ti o Comparisons
Acid-Test Ratio Year
BW
2007 2006 2005
1.00 1.04 1.11
Industry
1.25 1.23 1.25
Ratio is weaker than the industry average.
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Sum m ary of the Liqu idi ty Rati o Com pa ri so ns Ra tio
•
•
BW
Ind us try
Current
2.39
2.15
Acid-Test
1.00
1.25
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories.
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Cur re n t Ra tio – T rend A na lysis Com pa ri so n Trend A nalysis
of Current Ra tio
2.5 2.3
e lu a 2.1 V io t 1.9 a R
BW Industry
1.7 1.5 2005
2006 Analysis Year
2007
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A c id -Tes t Rati o – T re n d A na lysis Com pa ri so n Trend A nalys is o f Acid -Test Rati o 1.5 e1.3 u l a V1.0 o it a R0.8
0.5 2005
BW Industry
2006 Analysis Year
2007
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Sum m ary of the Liqu idi ty Tre nd A nal ys es •
•
•
The current ratio for B W has been rising at the same time the acid-test ratio has been declining. The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable. This indicates that inventories are a significant problem for B W .
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Fi n an c ia l L ev erage Ra tio s Balance Sheet Ratios Financial Leverage Ratios
Shows the extent to which the firm is financed by debt.
Debt-to-Equity
Total Debt Shareholders’ Equity For Basket Wonders December 31, 2007 $1,030 = 0.90 $1,139
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Fi n an c ia l Lev erage Rati o Com pa ri so ns
Debt-to-Equity Ratio Year
2007 2006 2005
BW
0.90 0.88 0.81
Industry
0.90 0.90 0.89
BW has average debt utilization relative to the industry average .
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Fi n an c ia l L ev erage Ra tio s Balance Sheet Ratios Financial Leverage Ratios
Shows the percentage of the firm’s assets that are supported by debt financing.
Debt-to-Total-Assets
Total Debt Total Assets For Basket Wond ers December 31, 2007 $1,030 = 0.47 $2,169
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Fi n an c ia l Lev erage Rati o Com pa ri so ns
Debt-to-Total-Asset Ratio Year
2007 2006 2005
BW
0.47 0.47 0.45
Industry
0.47 0.47 0.47
BW has average debt utilization relative to the industry average.
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Fi n an c ia l L ev erage Ra tio s Balance Sheet Ratios Financial Leverage Ratios Shows the relative importance of long-term debt to the long-term financing of the firm.
Total Capitaliz ation (i.e., LT-Debt + Equity)
Total Debt Total Capitalization For Basket Wond ers December 31, 2007 $1,030 = 0.62 $1,669
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Fi n an c ia l Lev erage Rati o Com pa ri so ns
Total Capitalization Ratio Year 2007 2006 2005
BW
0.62 0.62 0.67
Industry
0.60 0.61 0.62
BW has average long-term debt utilization relative to the industry average.
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Cov era g e R atios Income Statement Ratios Coverage Ratios
Indicates a firm’s ability to cover interest charges.
In tere s t Co verage
EBIT Interest Charges For Basket Wond ers December 31, 2007 $210 $59
= 3.56
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Coverage Rati o Com pa ri so ns
Interest Coverage Ratio Year
BW
2007 2006 2005
3.56 4.35 10.30
Industry
5.19 5.02 4.66
BW has below average interest coverage relative to the industry average.
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Co v erage Ra tio – T rend A na lysis Com pa ri so n Trend A nalysis
of Intere st Coverage Ra tio
11.0 9.0
e u l a V 7.0 o it a R 5.0
BW Industry
3.0 2005
2006 Analysis Year
2007
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Sum m ary o f the Covera g e Tre n d A n alysis •
The interest coverage ratio for B W has been falling since 2005. It has been below industry averages two years. for the past
•
•
This indicates that low earnings (EBIT) may be a potential problem for B W . Note, we know that debt levels are in line with the industry averages.
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A ctivity Ra ti os Income Statement/ Balance Sheet Ratios Activity Ratios Indicates quality of receivables and how successful the firm is in its collections.
Re ceivable T u rn ov er (Assume all sales are credit sales.)
Annual Net Credit Sales Receivables For Basket Wond ers December 31, 2007 $2,211 = 5.61 $394
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A ctivity Ra ti os Income Statement/ Balance Sheet
A vg Colle ction Pe riod
Days in the Year
Ratios
Receivable Turnover
Activity Ratios
For Basket Wond ers December 31, 2007
Average number of days that receivables are outstanding. (or RT in days)
365 5.61
= 65 days
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Activity Rati o Com pa ri so ns
Average Collection Period Year 2007 2006 2005
BW
65.0 71.1 83.6
Industry
65.7 66.3 69.2
BW has improved the average collection period to that of the industry average.
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A ctivity Ra ti os Income Statement/ Balance Sheet
Pa yab le T u rn o ver ( PT)
Ratios
Annual Credit Purchases Accounts Payable
Activity Ratios Indicates the promptness of payment to suppliers by the firm.
(Assume annual credit purchases = $1,551.)
For Basket Wonders December 31, 2007 $1551 = 16.5 $94
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A ctivity Ra ti os Income Statement/ Balance Sheet Ratios Activity Ratios Average number of days that payables are outstanding.
PT in Days
Days in the Year Payable Turnover For Basket Wond ers December 31, 2007 365 16.5
= 22. 1 day s
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Activity Rati o Com pa ri so ns
Payable Turnover in Days Year 2007 2006 2005
BW
22.1 25.4 43.5
Industry
46.7 51.1 48.5
BW has improved the PT in Days.
Is this good?
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A ctivity Ra ti os Income Statement/ Balance Sheet Ratios Activity Ratios Indicates the effectiveness of the inventory management practices of the firm.
Inv ento ry T urn ov er
Cost of Goods Sold Inventory For Basket Wond ers December 31, 2007 $1,599 = 2.30 $696
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Activity Rati o Com pa ri so ns
Inventory Turnover Ratio Year 2007 2006 2005
BW
2.30 2.44 2.64
Industry
3.45 3.76 3.69
BW has a very poor inventory turnover ratio.
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In v en to ry T u rn o ver Ra tio – Tre nd A na lysis Com pa ri so n Tre nd A nalysis
of Inventory
Turn ov er Ra tio
4.0 3.5 e lu a V3.0 o it a R2.5
BW Industry
2.0 2005
2006 Analysis Year
2007
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A ctivity Ra ti os Income Statement/ Balance Sheet Ratios Activity Ratios Indicates the overall effectiveness of the firm in utilizing its assets to generate sales.
Total Ass et Turno ver
Net Sales Total Assets For Basket Wond ers December 31, 2007 $2,211 = 1.02 $2,169
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Activity Rati o Com pa ri so ns
Total Asset Turnover Ratio Year 2007 2006 2005
BW
1.02 1.03 1.01
Industry
1.17 1.14 1.13
BW has a weak total asset turnover ratio.
Why is this ratio considered weak?
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Profita b ili ty Ra tios Income Statement/ Balance Sheet Ratios Profitability Ratios Indicates the efficiency of operations and firm pricing policies.
Gros s Profit Ma rgin
Gross Profit Net Sales For Basket Wond ers December 31, 2007 $612 = 0.277 $2,211
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Profitability Rati o Com pa ri so ns
Gross Profit Margin Year 2007 2006 2005
BW
27.7% 28.7 31.3
Industry
31.1% 30.8 27.6
BW has a weak Gross Profit Margin.
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Gros s Profit Ma rgin – Tre nd A na lysis Com pa ri so n Tre nd A nalysis o f Gross Profit M argin 35.0 ) 32.5 (% e u l 30.0 a V o it a 27.5 R
BW Industry
25.0 2005
2006 Analysis Year
2007
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Profita b ili ty Ra tios Income Statement/ Balance Sheet Ratios Profitability Ratios Indicates the firm’s profitability after taking account of all expenses and income taxes.
Ne t Pro fit Margin
Net Profit after Taxes Net Sales For Basket Wond ers December 31, 2007 $91 = 0.041 $2,211
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Profitability Rati o Com pa ri so ns
Net Profit Margin Year 2007 2006 2005
BW
4.1% 4.9 9.0
Industry
8.2% 8.1 7.6
BW has a poor Net Profit M argin.
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Ne t P ro fit Ma rg in – Tre nd A na lysis Com pa ri so n Tre nd An al ys is o f Net Profit Ma
rgin
10 ) % ( e lu a V o it a R
9 8 7
BW Industry
6 5 4 2005
2006 Analysis Year
2007
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Profita b ili ty Ra tios Income Statement/ Balance Sheet Ratios Profitability Ratios Indicates the profitability on the assets of the firm (after all expenses and taxes).
Re turn o n I nv estm ent
Net Profit after Taxes Total Assets For Basket Wond ers December 31, 2007 $91 = 0.042 $2,160
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Profitability Ra ti o Com pa ri so ns
Return on Investment Year 2007 2006 2005
BW
4.2% 5.0 9.1
Industry
9.6% 9.1 10.8
BW has a poor Return on Investment.
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Re turn o n I n vestm en t – Tre nd A na lysis Com pa ri so n Tre nd A nalysis o f Re turn o n I nv estment 12 ) 10 (% e u l 8 a V o it a 6 R
BW Industry
4 2005
2006 Analysis Year
2007
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Profita b ili ty Ra tios Income Statement/ Balance Sheet
Re turn on Equity Ne t Pro fit after Taxes
Ratios Profitability Ratios Indicates the profitability to the shareholders of the firm (after all expenses and taxes).
Shareholders’ Equity
For Basket Wond ers December 31, 2007 $91 = 0.08 $1,139
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Profitability Rati o Com pa ri so ns
Return on Equity Year 2007 2006 2005
BW
8.0% 9.4 16.6
Industry
18.0% 17.2 20.4
BW has a poor Return on Equity.
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Return on Equ it y – Tre nd A na lysis Com pa ri so n Tre nd A nalysis of
Re turn on Equity
21.0 ) ( 17.5 % e lu a 14.0 V o it a 10.5 R
BW Industry
7.0 2005
2006 Analysis Year
2007
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Re turn on Inv estm ent a n d the Du P on t Ap pro ach Earning Power = Sales profitability × Asset efficiency
ROI2007 ROIIndustry
ROI = Net profit margin × Total asset turnover = 0.041 × 1.02 = 0.042 or 4.2% = 0.082 × 1.17 = 0.096 or 9.6% (Note: values are rounded)
17-82
Re turn on Equ it y a nd the Du P on t Ap pro ach Return On Equity = Net profit margin X Total asset turnover X Equity Multiplier Total Assets Equity Multiplier = Shareholders’ Equity
ROE2007 = 0.041 × 1.02 × 1.90 = 0.080 ROEIndustry = 0.082 × 1.17 × 1.88 = 0.180 (Note: values are rounded)
17-83
Sum m ary of th e Profita bilit y Tre nd A nal ys es •
•
•
The profitability ratios for B W have A L L been falling since 2005. Each has been below the industry averages for the past three years. This indicates that COGS and administrative costs may both be too high and a potential problem for B W . Note, this result is consistent with the low interest coverage ratio.
17-84
Sum m ary of Ra ti o A na lyse s •
•
•
•
Inventories are too high. May be paying off creditors (accounts payable) too soon. COGS may be too high. Selling, general, and administrative costs may be too high.
17-85
Com m on -Siz e A nal ys is An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by n et sale s or revenues .
17-86
Basket Wonders’ Common Siz e B ala n c e Sh eets Regular (thousands of $) Assets
2005
2006
2007
Common-Size (%) 2005
2006
2007
Cash
148
100
90
12.10
4.89
4.15
AR Inv
283 322
410 616
394 696
23.14 26.33
20.06 30.14
18.17 32.09
Other CA
10
14
15
0.82
0.68
0.69
Tot CA
763
1,140
1,195
62.39
55.77
55.09
Net FA
349
631
701
28.54
30.87
32.32
LT Inv
0
50
50
0.00
2.45
2.31
111
223
223
9.08
10.91
10.28
1,223
2,044
2,169
100.0
100.0
100.0
Other LT Tot Assets
17-87
Basket Wonders’ CommonSiz e B al an c e S h eets Regular (thousands of $) Liab+Equity
2005
2006
2007
Common-Size (%) 2005
2006
2007
Note Pay
290
295
290
23.71
14.43
13.37
Acct Pay Accr Tax Other Accr
81 13 15
94 16 100
94 16 100
6.62 1.06 1.23
4.60 0.78 4.89
4.33 0.74 4.61
Tot CL LT Debt Equity
399 150 674
505 453 1,086
500 530 1,139
32.62 12.26 55.11
24.71 22.16 53.13
23.05 24.44 52.51
Tot L+E
1,223
2,044
2,169
100.0
100.0
100.0
17-88
Basket Wonders’ CommonSi ze In c o m e S ta te m en ts Regular (thousands of $) 2005 Net Sales
2006
2007
Common-Size (%) 2005
2006
2007
1,235
2,106
2,211
100.0
100.0
100.0
COGS Gross Profit Adm.
849 386 180
1,501 605 383
1,599 612 402
68.7 31.3 14.6
71.3 28.7 18.2
72.3 27.7 18.2
EBIT Int Exp
206 20
222 51
210 59
16.7 1.6
10.5 2.4
9.5 2.7
EBT
186
171
151
15.1
8.1
6.8
EAT
112
103
91
9.1
4.9
4.1
Cash Div
50
50
50
4.0
2.4
2.3