Financial Statement Analysis 13 Part One Financial Accounting

Financial Statement Analysis 13 Part One: Financial Accounting Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Return on Assets (ROA) Return on assets = Slide 13 -1 Net income + Interest (1 - Tax rate) Total assets $680. 7 + $33. 3(. 66) $4, 237. 1 16. 6 percent Return on assets (ROA) reflects how much the firm has earned on the investment of all the financial resources committed to the firm. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Return on Invested Capital Return on invested capital = Slide 13 -2 Net income + Interest (1 - Tax rate) Long-term liabilities + Shareholders’ equity $680. 7 + $33. 3(. 66) $1, 309. 1 + $1, 713. 4 Return on invested capital = 23. 2 percent Return on invested capital focuses more on the use of permanent capital (noncurrent liabilities plus shareholders’ equity) Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Return on Shareholders’ Equity Return on shareholders’ equity = Slide 13 -3 Net income Shareholders’ equity $680. 7 $1, 713. 4 39. 7 percent Return on shareholders’ equity (ROE) reflects how much the firm has earned on the funds invested by the shareholders. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Return on Investment Slide 13 -4 Net income Sales profit margin or return on sales Irwin/Mc. Graw-Hill Sales * Investment turnover © The Mc. Graw-Hill Companies, Inc. , 1999

Price/Earnings Ratio (P/E) Price/earnings ratio = Slide 13 -5 Market price per share Net income per share $65. 375 Price/earnings ratio = $2. 94 22 times The price/earnings ratio (P/E) is the best indicator of how investors judge the firm’s future performance. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Gross Margin Percentage Gross margin percentage = Irwin/Mc. Graw-Hill Slide 13 -6 Gross margin Net sales revenues $3, 306. 4 $6, 295. 4 52. 5 percent © The Mc. Graw-Hill Companies, Inc. , 1999

Profit Margin Profit margin = Irwin/Mc. Graw-Hill Slide 13 -7 Net income Net sales revenues $680. 7 $6, 295. 4 10. 8 percent © The Mc. Graw-Hill Companies, Inc. , 1999

Earnings Per Share Earnings per share = Slide 13 -8 Net income Number of shares of common stock outstanding $680. 7 Earnings per share = Irwin/Mc. Graw-Hill 231. 5 $2. 94 © The Mc. Graw-Hill Companies, Inc. , 1999

Asset Turnover Asset turnover = Slide 13 -9 Sales revenue Total assets $6, 295. 4 Asset turnover = Irwin/Mc. Graw-Hill $4, 237. 1 1. 5 times © The Mc. Graw-Hill Companies, Inc. , 1999

Investment Capital Turnover Invested capital turnover = Irwin/Mc. Graw-Hill Slide 13 -10 Sales revenue Invested capital $6, 295. 4 $4, 237. 1 1. 5 times © The Mc. Graw-Hill Companies, Inc. , 1999

Equity. Turnover Equity turnover = Irwin/Mc. Graw-Hill Slide 13 -11 Sales revenue Shareholders’ equity $6, 295. 4 $1, 713. 4 3. 7 times © The Mc. Graw-Hill Companies, Inc. , 1999

Capital Intensity Capital intensity = Slide 13 -12 Sales revenue Property, plant, and equipment $6, 295. 4 $2, 768. 4 2. 3 times The capital intensity ratio focuses only on the usage of property, plant, and equipment. Companies with a high ratio are particularly vulnerable to cyclical fluctuations. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Working Capital Turnover Working capital turnover = Slide 13 -13 Sales revenue Working capital $6, 295. 4 $30. 5 206 times Working capital is current assets minus current liabilities Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Days’ Payables Slide 13 -14 Days’ payables = Operating payables Pretax cash expenses/365 $308. 8 + $76. 5 + $233. 8 + $141. 4 $760. 5 $4, 996. 1/365 56 days Operating payables include accounts payable, accrued wages and payroll taxes, and other items that represent deferred payments for operating expenses. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Cash Conversion Cycle Slide 13 -15 Days Receivables conversion period (days’ receivables) 31 Plus: inventory conversion period (days’ inventory 49 Operating cycle 80 Less: payment deferral period (days’ payable) 56 Cash conversion cycle 24 The result of this calculation is a measure of liquidity; it also indicates the time interval for which additional short-term financing might be needed to support a spurt in sales. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Dividend Yield Dividend yield = Irwin/Mc. Graw-Hill Slide 13 -16 Dividends per share Market price per share $1. 32 $65. 375 2. 0 percent © The Mc. Graw-Hill Companies, Inc. , 1999

Dividend Payout Dividend payout = Irwin/Mc. Graw-Hill Slide 13 -17 Dividends Net income $305. 2 $680. 7 45 percent © The Mc. Graw-Hill Companies, Inc. , 1999

Other Key Ratios Slide 13 -18 Days’ cash Cash expenses/365 Days’ receivables Accounts receivable Sales/365 Days’ inventory Inventory Cost of sales/365 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Other Key Ratios Slide 13 -19 Inventory turnover Cost of Sales Inventory Current ratio Current assets Current liabilities Acid-test (quick) ratio Monetary current assets Current liabilities Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Other Key Ratios Slide 13 -20 Financial leverage ratio Assets Stockholders’ equity Debt/equity ratio Long-term liabilities Shareholders’ equity Times interest earned Pretax operating profit + Interest Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999

Chapter 13 The End Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1999