Lecture Managerial finance - Chapter 4: Analysis of financial statements

Lecture Managerial finance - Chapter 4: Analysis of financial statements. After studying this chapter you will be able to understand: Ratio analysis, du pont system, effects of improving ratios, limitations of ratio analysis, qualitative factors.
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Lecture Managerial finance - Chapter 4: Analysis of financial statementsCHAPTER4 AnalysisofFinancialStatements 1TopicsinChapter Ratioanalysis DuPontsystem Effectsofimprovingratios Limitationsofratioanalysis Qualitativefactors 2IncomeStatement 2007 2008ESales 5,834,400 7,035,600COGS 4,980,000 5,800,000Otherexpenses 720,000 612,960Deprec. 116,960 120,000Tot.op.costs 5,816,960 6,532,960EBIT 17,440 502,640Int.expense 176,000 80,000EBT (158,560) 422,640Taxes(40%) (63,424) 169,056Netincome (95,136) 253,584 3BalanceSheets:Assets 2007 2008ECash 7,282 14,000STinvest. 20,000 71,632AR 632,160 878,000Inventories 1,287,360 1,716,480TotalCA 1,946,802 2,680,112NetFA 939,790 836,840Totalassets 2,886,592 3,516,952 4BalanceSheets:Liabilities&Equity 2007 2008EAccts.payable 324,000 359,800Notespayable 720,000 300,000Accruals 284,960 380,000TotalCL 1,328,960 1,039,800Longtermdebt 1,000,000 500,000Commonstock 460,000 1,680,936Ret.earnings 97,632 296,216Totalequity 557,632 1,977,152TotalL&E 2,886,592 5 3,516,952OtherData 2007 2008EStockprice $6.00 $12.17#ofshares 100,000 250,000EPS $0.95 $1.01DPS $0.11 $0.22Bookval.pershare $5.58 $7.91Leasepayments $40,000 $40,000Taxrate 0.4 6 0.4Whyareratiosuseful? Standardizenumbers;facilitate comparisons Usedtohighlightweaknessesand strengths 7FiveMajorCategoriesofRatios Liquidity:Canwemakerequired paymentsastheyfalldue? Assetmanagement:Dowehavethe rightamountofassetsforthelevelof sales? (More…) 8RatioCategories(Continued) Debtmanagement:Dowehavethe rightmixofdebtandequity? Profitability:Dosalespricesexceed unitcosts,andaresaleshighenough asreflectedinPM,ROE,andROA? Marketvalue:Doinvestorslikewhat theyseeasreflectedinP/EandM/B ratios? 9 ForecastedCurrentandQuick Ratiosfor2008. CA $2,680CR08 = CL = $1,040 = 2.58x. CA - Inv.QR08 = CL $2,680 - $1,716 = $1,040 = 0.93x. 10CommentsonCRandQR 2008E 2007 2006 Ind.CR 2.58x 1.46x 2.3x 2.7xQR 0.93x 0.5x 0.8x 1.0x Expectedtoimprovebutstillbelowthe industryaverage. Liquiditypositionisweak. 11 InventoryTurnoverRatiovs. IndustryAverage SalesInv. turnover = Inventories $7,036 = = 4.10x. $1,716 2008E 2007 2006 Ind.Inv. T. 4.1x 4.5x 4.8x 6.1x 12CommentsonInventoryTurnover Inventoryturnoverisbelowindustry average. Firmmighthaveoldinventory,orits controlmightbepoor. Noimprovementiscurrentlyforecasted. 13DSO:averagenumberofdaysfromsaleuntilcashreceived.DSO = Receivables Average sales per day $878 = Receivables = $7,036/365 Sales/365 = 45.5 days. 14AppraisalofDSO Firmcollectstooslowly,andsituationis gettingworse. Poorcreditpolicy. 2008 2007 2006 Ind.DSO 45.5 39.5 37.4 32.0 15FixedAssetsandTotalAssetsTurnoverRatiosFixed assets Sales = turnover Net fixed assets = $7,036 = 8.41x. $837Total assets Sales = turnover Total assets = $7,036 = 2.00x. $3,517 (More…) 16FixedAssetsandTotalAssetsTurnoverRatios FAturnoverisexpectedtoexceedindustryaverage. Good. TAturnovernotuptoindustryaverage.Causedby excessivecurrentassets(A/Randinventory). 2008E 2007 2006 Ind.FATO 8.4x 6.2x 10.0x 7.0xTATO 2.0x 2.0x 2.3x 2.5x 17Calculatethedebt,TIE,andEBITDAcoverageratios. Total liabilitiesDebt ratio = Total assets $1,040 + $500 = $3,517 = 43.8%. EBIT TIE = Int. expense = $502.6 = 6.3x. $80 (More…) 18 EBITDACoverage(EC)EBIT + Depr. & Amort. + Lease payments Interest Lease expense + pmt. + Loan pmt.= $502.6 + $120 + $40 = $80 + $40 + $05.5x. 19 DebtManagementRatiosvs ...