2013 NACM You cant manage what you cant

© 2013 NACM You can’t manage what you can’t measure! Throttle-Net profit margin Stick-Total asset turnover Flaps-Leverage

FINANCIAL ANALYSIS Separating a thing (financial statements) into parts: Turnover & Leverage Margins Balance Sheet Income Statement Off Balance Sheet Financing Notes Cash Flow Statement Cash Profits Versus Accounting Profits MD&A Financial Condition & Operating Results

Net Income Equity ROE is Net Profit Margin x Total Asset Turnover x Leverage Return on Assets Net Income Sales Margins x Sales Assets Turnover x Assets Equity Leverage

ROE = Net Income Equity NI Sales x Sales Assets x Margins x Turnover x Assets Equity Leverage Balance Sheet Income Statement Sales COG Gross Margin Operating Expenses Operating Margin Interest & Taxes Net Profit Margin Left – debit Right - credit Current Debt Long-term Debt Total Debt Long-term Investments Equity Financing

ROE / Five Step Process Ø Margins Ø Turnover “Analysis of steps 1 through 4” Ø Leverage Ø Cash Ø Recommendation

Margins (Income Statement) Operations • • Sales growth Return on equity (ROE) Return on Investment (ROI) Gross profit margin – Sales and Cost of goods sold • Operating profit margin – Operating expenses • Net profit margin

Turnover (Balance Sheet) • • Asset Management Accounts receivable in days Inventory in days Accounts payable in days Total asset turnover

Leverage (Balance Sheet) Financing • • • Debt ratio Long-term debt to total capital Debt to equity Times interest earned Fixed charge coverage ratio

Cash • • Current ratio Quick or acid test ratio Cash flow from operations Cash flow liquidity ratio Working capital Trade cycle Cash conversation cycle

Recommendation • Support the decision with your analysis of: – Operations – Asset management – Leverage – Cash – Yes or no and what credit arrangements