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Transcript of 1 Financial Statement Analysis Dr. Rana Singh 98 11 828 987 .
1
Financial Statement AnalysisDr. Rana
Singhwww.ranasingh.org
98 11 828 987
2
Financial Financial Statement AnalysisStatement AnalysisFinancial Financial Statement AnalysisStatement Analysis
Financial Statements
A Possible Framework for Analysis
Ratio Analysis
Trend Analysis
Common-Size and Index Analysis
Financial Statements
A Possible Framework for Analysis
Ratio Analysis
Trend Analysis
Common-Size and Index Analysis
3
Examples of External Examples of External Uses of Statement Uses of Statement AnalysisAnalysis
Examples of External Examples of External Uses of Statement Uses of Statement AnalysisAnalysis
Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm.
BondholdersBondholders -- Focus on the long-term cash flow of the firm.
ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
Trade CreditorsTrade Creditors -- Focus on the liquidity of the firm.
BondholdersBondholders -- Focus on the long-term cash flow of the firm.
ShareholdersShareholders -- Focus on the profitability and long-term health of the firm.
4
Examples of Internal Examples of Internal Uses of Statement Uses of Statement AnalysisAnalysis
Examples of Internal Examples of Internal Uses of Statement Uses of Statement AnalysisAnalysis
PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
ControlControl -- Focus on return on investment for various assets and asset efficiency.
UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
PlanPlan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
ControlControl -- Focus on return on investment for various assets and asset efficiency.
UnderstandUnderstand -- Focus on understanding how suppliers of funds analyze the firm.
5
Primary Types of Primary Types of Financial StatementsFinancial StatementsPrimary Types of Primary Types of Financial StatementsFinancial Statements
Income StatementIncome Statement A summary of a firm’s revenues and expenses
over a specified period, ending with net income or loss for the period.
Income StatementIncome Statement A summary of a firm’s revenues and expenses
over a specified period, ending with net income or loss for the period.
Balance SheetBalance Sheet A summary of a firm’s financial position on
a given date that shows total assets = total liabilities + owners’ equity.
Balance SheetBalance Sheet A summary of a firm’s financial position on
a given date that shows total assets = total liabilities + owners’ equity.
6
Basket Wonders’ Basket Wonders’ Balance Sheet (Asset Balance Sheet (Asset Side)Side)
Basket Wonders’ Basket Wonders’ Balance Sheet (Asset Balance Sheet (Asset Side)Side)
a. How the firm stands on a specific date.
b. What BW owned.c. Amounts owed by
customers.d. Future expense items
already paid.e. Cash/likely convertible to
cash within 1 year.f. Original amount paid.g. Acc. deductions for wear
and tear.
a. How the firm stands on a specific date.
b. What BW owned.c. Amounts owed by
customers.d. Future expense items
already paid.e. Cash/likely convertible to
cash within 1 year.f. Original amount paid.g. Acc. deductions for wear
and tear.
Cash and C.E. * 90 Acct. Rec.cc 394 Inventories 696 Prepaid Exp dd 5 Accum Tax Prepay 10
Current AssetsCurrent Assetsee *1,195 *1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329)
Net Fix. AssetsNet Fix. Assets * 701 * 701 Investment, LT 50 Other Assets, LT 223
Total AssetsTotal Assets bb *2,169 *2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003a
7
Basket Wonders’ Basket Wonders’ Balance Sheet (Liability Balance Sheet (Liability Side)Side)
Basket Wonders’ Basket Wonders’ Balance Sheet (Liability Balance Sheet (Liability Side)Side)
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
Notes Payable * 290 Acct. Payablecc 94 Accrued Taxes dd 16 Other Accrued Liab. dd 100 Current Liab.Current Liab. ee * * 500 500 Long-Term Debt ff
530 Shareholders’ Equity Com. Stock (*1 par) gg
200 Add Pd in Capital gg
729 Retained Earnings hh 210 Total Total EquityEquity * *1,1391,139 Total Liab/EquityTotal Liab/Equitya,ba,b *2,169 *2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003
8
Basket Wonders’ Basket Wonders’ Income StatementIncome StatementBasket Wonders’ Basket Wonders’ Income StatementIncome Statement
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
Net Sales * 2,211 Cost of Goods Sold bb 1,599
Gross Profit * 612 SG&A Expenses c c 402 EBITd * 210 Interest Expensee 59 EBT f f * 151 Income Taxes 60
EATg * 91 Cash Dividends 38 Increase in REIncrease in RE * 53 * 53
Basket Wonders Statement of Earnings (in thousands) Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2003for Year Ending December 31, 2003a
9
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
Analytical Tools UsedAnalytical Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
Analytical Tools UsedAnalytical Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
Trend / Seasonal ComponentTrend / Seasonal Component
How much funding will be required in the future?
Is there a seasonal component?
Trend / Seasonal ComponentTrend / Seasonal Component
How much funding will be required in the future?
Is there a seasonal component?
10
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
Health of a Firm
Financial Ratios
1. Individually2. Over time3. In
combination4. In comparison
Health of a Firm
Financial Ratios
1. Individually2. Over time3. In
combination4. In comparison
1. Analysis of the funds needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
11
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
ExamplesExamples::
Volatility in sales
Volatility in costs
Proximity to break-even point
ExamplesExamples::
Volatility in sales
Volatility in costs
Proximity to break-even point
1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm.
3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
Business riskBusiness risk relates to the risk inherent in the operations of the firm.
Business riskBusiness risk relates to the risk inherent in the operations of the firm.
12
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
A Financial Manager
must consider all three jointly
when determining the financing needs of the
firm.
A Financial Manager
must consider all three jointly
when determining the financing needs of the
firm.
DeterminingDeterminingthe the
financingfinancingneeds of needs of the firm.the firm.
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
13
Framework for Framework for Financial AnalysisFinancial AnalysisFramework for Framework for Financial AnalysisFinancial Analysis
NegotiationsNegotiationswithwith
suppliers ofsuppliers ofcapital.capital.
DeterminingDeterminingthe the
financingfinancingneeds of needs of the firm.the firm.
1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm.
2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm.
3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm.
14
Use of Financial Use of Financial RatiosRatios
Use of Financial Use of Financial RatiosRatios
Types of Types of ComparisonsComparisons
Internal Internal ComparisonsComparisons
External External ComparisonsComparisons
Types of Types of ComparisonsComparisons
Internal Internal ComparisonsComparisons
External External ComparisonsComparisons
A Financial Ratio is an index that relates two accounting numbers and is obtained by
dividing one number by the other.
15
External Comparisons External Comparisons and Sources of and Sources of Industry RatiosIndustry Ratios
External Comparisons External Comparisons and Sources of and Sources of Industry RatiosIndustry Ratios
Examples:CMIE-PROWESS CMIE-PROWESS
DatabaseDatabase
Capitaline.comCapitaline.com
IndiaInfoline.com, IndiaInfoline.com, ICICI, ICRA, ICICI, ICRA,
CARE, CRISIL, CARE, CRISIL, NSE, BSE NSE, BSE DirectoryDirectory
Examples:CMIE-PROWESS CMIE-PROWESS
DatabaseDatabase
Capitaline.comCapitaline.com
IndiaInfoline.com, IndiaInfoline.com, ICICI, ICRA, ICICI, ICRA,
CARE, CRISIL, CARE, CRISIL, NSE, BSE NSE, BSE DirectoryDirectory
This involves comparing the ratios of one firm with those of similarsimilar firms or with
industry averages.
SimilaritySimilarity is important as one should
compare “apples to apples.”
16
Liquidity RatiosLiquidity RatiosLiquidity RatiosLiquidity Ratios
CurrentCurrent
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
CurrentCurrent
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
Shows a firm’s ability to cover its current
liabilities with its current assets.
Balance Sheet Ratios
Liquidity Ratios
*1,195*1,195*500*500
= 2.392.39
17
Liquidity Ratio Liquidity Ratio ComparisonsComparisonsLiquidity Ratio Liquidity Ratio ComparisonsComparisons
BW Industry
2.39 2.15
2.26 2.09
1.91 2.01
BW Industry
2.39 2.15
2.26 2.09
1.91 2.01
Year
2003
2002
2001
CurrentCurrent RatioRatio
Ratio is stronger than the industry average.
18
Liquidity RatiosLiquidity RatiosLiquidity RatiosLiquidity Ratios
Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For Basket Wonders December 31, 2003
Shows a firm’s ability to meet current
liabilities with its most liquid assets.
Balance Sheet Ratios
Liquidity Ratios
*1,195 - *696*1,195 - *696*500*500
= 1.001.00
19
Liquidity Ratio Liquidity Ratio ComparisonsComparisonsLiquidity Ratio Liquidity Ratio ComparisonsComparisons
BW Industry
1.00 1.25
1.04 1.23
1.11 1.25
BW Industry
1.00 1.25
1.04 1.23
1.11 1.25
Year
2003
2002
2001
Acid-Test RatioAcid-Test Ratio
Ratio is weaker than the industry average.
20
Summary of the Summary of the Liquidity Ratio Liquidity Ratio ComparisonsComparisons
Summary of the Summary of the Liquidity Ratio Liquidity Ratio ComparisonsComparisons
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.
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.
RatioRatio BWBW IndustryIndustry
Current 2.39 2.15
Acid-Test 1.00 1.25
21
Current Ratio -- Trend Current Ratio -- Trend Analysis ComparisonAnalysis ComparisonCurrent Ratio -- Trend Current Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Current Ratio
1.5
1.7
1.9
2.1
2.3
2.5
2001 2002 2003
Analysis Year
Rat
io V
alue
BWIndustry
22
Acid-Test Ratio -- Trend Acid-Test Ratio -- Trend Analysis ComparisonAnalysis ComparisonAcid-Test Ratio -- Trend Acid-Test Ratio -- Trend Analysis ComparisonAnalysis Comparison
Trend Analysis of Acid-Test Ratio
0.5
0.8
1.0
1.3
1.5
2001 2002 2003
Analysis Year
Ratio
Val
ue
BWIndustry
23
Summary of the Summary of the Liquidity Trend Liquidity Trend AnalysesAnalyses
Summary of the Summary of the Liquidity Trend Liquidity Trend AnalysesAnalyses
The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventoriesinventories are a significant problem for BWBW.
The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventoriesinventories are a significant problem for BWBW.
The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining.
24
Financial Leverage Financial Leverage RatiosRatiosFinancial Leverage Financial Leverage RatiosRatios
Debt-to-EquityDebt-to-Equity
Total DebtTotal DebtShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003
Debt-to-EquityDebt-to-Equity
Total DebtTotal DebtShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003Shows the extent to
which the firm is financed by debt.
Balance Sheet Ratios
Financial LeverageRatios
*1,030*1,030*1,139*1,139
= .90.90
25
Financial Leverage Financial Leverage Ratio ComparisonsRatio ComparisonsFinancial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry
.90 .90
.88 .90
.81 .89
BW Industry
.90 .90
.88 .90
.81 .89
Year
2003
2002
2001
Debt-to-Equity RatioDebt-to-Equity Ratio
BW has average debt utilizationrelative to the industry average.
26
Financial Leverage Financial Leverage RatiosRatiosFinancial Leverage Financial Leverage RatiosRatios
Debt-to-Total-AssetsDebt-to-Total-Assets
Total DebtTotal DebtTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Debt-to-Total-AssetsDebt-to-Total-Assets
Total DebtTotal DebtTotal AssetsTotal Assets
For Basket Wonders December 31, 2003Shows the percentage
of the firm’s assets that are supported by debt
financing.
Balance Sheet Ratios
Financial LeverageRatios
*1,030*1,030*2,169*2,169
= .47.47
27
Financial Leverage Financial Leverage Ratio ComparisonsRatio ComparisonsFinancial Leverage Financial Leverage Ratio ComparisonsRatio Comparisons
BW Industry
.47 .47
.47 .47
.45 .47
BW Industry
.47 .47
.47 .47
.45 .47
Year
2003
2002
2001
Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio
BW has average debt utilizationrelative to the industry average.
28
Coverage RatiosCoverage RatiosCoverage RatiosCoverage Ratios
Interest CoverageInterest Coverage
EBITEBITInterest ChargesInterest Charges
For Basket Wonders December 31, 2003
Interest CoverageInterest Coverage
EBITEBITInterest ChargesInterest Charges
For Basket Wonders December 31, 2003Indicates a firm’s
ability to cover interest charges.
Income StatementRatios
Coverage Ratios
*210*210*59*59
= 3.563.56
29
CoverageCoverageRatio ComparisonsRatio ComparisonsCoverageCoverageRatio ComparisonsRatio Comparisons
BW Industry
3.56 5.19
4.35 5.02
10.30 4.66
BW Industry
3.56 5.19
4.35 5.02
10.30 4.66
Year
2003
2002
2001
Interest Coverage RatioInterest Coverage Ratio
BW has below average interest coveragerelative to the industry average.
30
Coverage Ratio -- Coverage Ratio -- Trend Analysis Trend Analysis ComparisonComparison
Coverage Ratio -- Coverage Ratio -- Trend Analysis Trend Analysis ComparisonComparison
Trend Analysis of Interest Coverage Ratio
3.0
5.0
7.0
9.0
11.0
2001 2002 2003
Analysis Year
Ratio
Val
ue
BWIndustry
31
Summary of the Summary of the Coverage Trend Coverage Trend AnalysisAnalysis
Summary of the Summary of the Coverage Trend Coverage Trend AnalysisAnalysis
This indicates that low earnings low earnings (EBIT) may be a potential problem for BWBW.
Note, we know that debt levels debt levels are in line with the industryindustry averages.
This indicates that low earnings low earnings (EBIT) may be a potential problem for BWBW.
Note, we know that debt levels debt levels are in line with the industryindustry averages.
The interest coverage ratio for BWBW has been falling since 2001. It has been below industryindustry averages for the past two years.
The interest coverage ratio for BWBW has been falling since 2001. It has been below industryindustry averages for the past two years.
32
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Receivable TurnoverReceivable Turnover
Annual Net Credit SalesAnnual Net Credit SalesReceivablesReceivables
For Basket Wonders December 31, 2003
Receivable TurnoverReceivable Turnover
Annual Net Credit SalesAnnual Net Credit SalesReceivablesReceivables
For Basket Wonders December 31, 2003Indicates quality of
receivables and how successful the firm is in its
collections.
Income Statement /Balance Sheet
Ratios
Activity Ratios
*2,211*2,211*394*394
= 5.615.61
(Assume all sales are credit sales.)
33
Activity RatiosActivity RatiosActivity RatiosActivity RatiosAvg Collection PeriodAvg Collection Period
Days in the YearDays in the YearReceivable TurnoverReceivable Turnover
For Basket Wonders December 31, 2003
Avg Collection PeriodAvg Collection Period
Days in the YearDays in the YearReceivable TurnoverReceivable Turnover
For Basket Wonders December 31, 2003
Average number of days that receivables are
outstanding.(or RT in days)
Income Statement /Balance Sheet
Ratios
Activity Ratios
3653655.615.61
= 65 days65 days
34
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
65.0 65.7
71.1 66.3
83.6 69.2
BW Industry
65.0 65.7
71.1 66.3
83.6 69.2
Year
2003
2002
2001
Average Collection PeriodAverage Collection Period
BW has improved the average collection period to that of the industry average.
35
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Payable Turnover (PT)Payable Turnover (PT)
Annual Credit PurchasesAnnual Credit PurchasesAccounts PayableAccounts Payable
For Basket Wonders December 31, 2003
Payable Turnover (PT)Payable Turnover (PT)
Annual Credit PurchasesAnnual Credit PurchasesAccounts PayableAccounts Payable
For Basket Wonders December 31, 2003
Indicates the promptness of payment to suppliers by
the firm.
Income Statement /Balance Sheet
Ratios
Activity Ratios
*1551*1551*94*94 = 16.516.5
(Assume annual credit purchases = *1,551.)
36
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
PT in DaysPT in Days
Days in the YearDays in the YearPayable TurnoverPayable Turnover
For Basket Wonders December 31, 2003
PT in DaysPT in Days
Days in the YearDays in the YearPayable TurnoverPayable Turnover
For Basket Wonders December 31, 2003
Average number of days that payables are
outstanding.
Income Statement /Balance Sheet
Ratios
Activity Ratios
36536516.516.5
= 22.1 days22.1 days
37
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
22.1 46.7
25.4 51.1
43.5 48.5
BW Industry
22.1 46.7
25.4 51.1
43.5 48.5
Year
2003
2002
2001
Payable Turnover in DaysPayable Turnover in Days
BW has improved the PT in Days.Is this good?Is this good?
38
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Inventory TurnoverInventory Turnover
Cost of Goods SoldCost of Goods SoldInventoryInventory
For Basket Wonders December 31, 2003
Inventory TurnoverInventory Turnover
Cost of Goods SoldCost of Goods SoldInventoryInventory
For Basket Wonders December 31, 2003Indicates the
effectiveness of the inventory management practices of the firm.
Income Statement /Balance Sheet
Ratios
Activity Ratios
*1,599*1,599*696*696
= 2.302.30
39
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
2.30 3.45
2.44 3.76
2.64 3.69
BW Industry
2.30 3.45
2.44 3.76
2.64 3.69
Year
2003
2002
2001
Inventory Turnover RatioInventory Turnover Ratio
BW has a very poor inventory turnover ratio.
40
Inventory Turnover Inventory Turnover Ratio --Trend Analysis Ratio --Trend Analysis ComparisonComparison
Inventory Turnover Inventory Turnover Ratio --Trend Analysis Ratio --Trend Analysis ComparisonComparison
Trend Analysis of Inventory Turnover Ratio
2.0
2.5
3.0
3.5
4.0
2001 2002 2003
Analysis Year
Rat
io V
alue
BWIndustry
41
Activity RatiosActivity RatiosActivity RatiosActivity Ratios
Total Asset TurnoverTotal Asset Turnover
Net SalesNet SalesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Total Asset TurnoverTotal Asset Turnover
Net SalesNet SalesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003Indicates the overall
effectiveness of the firm in utilizing its assets to
generate sales.
Income Statement /Balance Sheet
Ratios
Activity Ratios
*2,211*2,211*2,169*2,169
= 1.021.02
42
ActivityActivityRatio ComparisonsRatio ComparisonsActivityActivityRatio ComparisonsRatio Comparisons
BW Industry
1.02 1.17
1.03 1.14
1.01 1.13
BW Industry
1.02 1.17
1.03 1.14
1.01 1.13
Year
2003
2002
2001
Total Asset Turnover RatioTotal Asset Turnover Ratio
BW has a weak total asset turnover ratio.Why is this ratio considered weak?Why is this ratio considered weak?
43
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Gross Profit MarginGross Profit Margin
Gross ProfitGross ProfitNet SalesNet Sales
For Basket Wonders December 31, 2003
Gross Profit MarginGross Profit Margin
Gross ProfitGross ProfitNet SalesNet Sales
For Basket Wonders December 31, 2003
Indicates the efficiency of operations and firm
pricing policies.
Income Statement /Balance Sheet
Ratios
Profitability Ratios
*612*612*2,211*2,211
= .277277
44
ProfitabilityProfitabilityRatio ComparisonsRatio ComparisonsProfitabilityProfitabilityRatio ComparisonsRatio Comparisons
BW Industry
27.7% 31.1%
28.7 30.8
31.3 27.6
BW Industry
27.7% 31.1%
28.7 30.8
31.3 27.6
Year
2003
2002
2001
Gross Profit MarginGross Profit Margin
BW has a weak Gross Profit Margin.
45
Gross Profit Margin --Gross Profit Margin --Trend Analysis Trend Analysis ComparisonComparison
Gross Profit Margin --Gross Profit Margin --Trend Analysis Trend Analysis ComparisonComparison
Trend Analysis of Gross Profit Margin
25.0
27.5
30.0
32.5
35.0
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
46
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Net Profit MarginNet Profit Margin
Net Profit after TaxesNet Profit after TaxesNet SalesNet Sales
For Basket Wonders December 31, 2003
Net Profit MarginNet Profit Margin
Net Profit after TaxesNet Profit after TaxesNet SalesNet Sales
For Basket Wonders December 31, 2003Indicates the firm’s
profitability after taking account of all expenses
and income taxes.
Income Statement /Balance Sheet
Ratios
Profitability Ratios
*91*91*2,211*2,211
= .041.041
47
Profitability Ratio Profitability Ratio ComparisonsComparisonsProfitability Ratio Profitability Ratio ComparisonsComparisons
BW Industry
4.1% 8.2%
4.9 8.1
9.0 7.6
BW Industry
4.1% 8.2%
4.9 8.1
9.0 7.6
Year
2003
2002
2001
Net Profit MarginNet Profit Margin
BW has a poor Net Profit Margin.
48
Net Profit Margin --Net Profit Margin --Trend Analysis Trend Analysis ComparisonComparison
Net Profit Margin --Net Profit Margin --Trend Analysis Trend Analysis ComparisonComparison
Trend Analysis of Net Profit Margin
4
5
6
7
8
9
10
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
49
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Return on AssetsReturn on Assets
Net Profit after TaxesNet Profit after TaxesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003
Return on AssetsReturn on Assets
Net Profit after TaxesNet Profit after TaxesTotal AssetsTotal Assets
For Basket Wonders December 31, 2003Indicates the profitability
on the assets of the firm (after all expenses and
taxes).
Income Statement /Balance Sheet
Ratios
Profitability Ratios
*91*91*2,160*2,160
= .042.042
50
ProfitabilityProfitability Ratio Ratio ComparisonsComparisonsProfitabilityProfitability Ratio Ratio ComparisonsComparisons
BW Industry
4.2% 9.8%
5.0 9.1
9.1 10.8
BW Industry
4.2% 9.8%
5.0 9.1
9.1 10.8
Year
2003
2002
2001
Return on AssetsReturn on Assets
BW has a poor Return on Assets.
51
Return on Assets –Return on Assets –Trend Analysis Trend Analysis ComparisonComparison
Return on Assets –Return on Assets –Trend Analysis Trend Analysis ComparisonComparison
Trend Analysis of Return on Investment
4
6
8
10
12
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
52
Profitability RatiosProfitability RatiosProfitability RatiosProfitability Ratios
Return on EquityReturn on Equity
Net Profit after TaxesNet Profit after TaxesShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003
Return on EquityReturn on Equity
Net Profit after TaxesNet Profit after TaxesShareholders’ EquityShareholders’ Equity
For Basket Wonders December 31, 2003Indicates the profitability to
the shareholders of the firm (after all expenses
and taxes).
Income Statement /Balance Sheet
Ratios
Profitability Ratios
*91*91*1,139*1,139
= .08.08
53
ProfitabilityProfitability Ratio Ratio ComparisonsComparisons
ProfitabilityProfitability Ratio Ratio ComparisonsComparisons
BW Industry
8.0% 17.9%
9.4 17.2
16.6 20.4
BW Industry
8.0% 17.9%
9.4 17.2
16.6 20.4
Year
2003
2002
2001
Return on EquityReturn on Equity
BW has a poor Return on Equity.
54
Return on Equity --Return on Equity --Trend Analysis Trend Analysis ComparisonComparison
Return on Equity --Return on Equity --Trend Analysis Trend Analysis ComparisonComparison
Trend Analysis of Return on Equity
7.0
10.5
14.0
17.5
21.0
2001 2002 2003
Analysis Year
Rat
io V
alu
e (%
)
BW
Industry
55
Return on Investment Return on Investment and the Du Pont and the Du Pont ApproachApproach
Return on Investment Return on Investment and the Du Pont and the Du Pont ApproachApproach
ROIROI2003 = .041 x 1.02 = .042.042 or 4.2%4.2%
ROIROIIndustry = .082 x 1.17 = .098.098 or 9.8%9.8%
ROIROI2003 = .041 x 1.02 = .042.042 or 4.2%4.2%
ROIROIIndustry = .082 x 1.17 = .098.098 or 9.8%9.8%
ROI ROI = Net profit margin X Total asset turnover
Earning Power Earning Power = Sales profitability X Asset efficiency
56
Return on Equity and Return on Equity and the Du Pont Approachthe Du Pont ApproachReturn on Equity and Return on Equity and the Du Pont Approachthe Du Pont Approach
ROEROE2003 = .041 x 1.02 x 1.90 = .080.080
ROEROEIndustry = .082 x 1.17 x 1.88 = .179179
ROEROE2003 = .041 x 1.02 x 1.90 = .080.080
ROEROEIndustry = .082 x 1.17 x 1.88 = .179179
Return On Equity Return On Equity = Net profit margin X Total asset turnover X
Equity Multiplier
Equity Multiplier Equity Multiplier = Total Assets
Shareholders’ Equity
57
Summary of the Summary of the Profitability Trend Profitability Trend AnalysesAnalyses
Summary of the Summary of the Profitability Trend Profitability Trend AnalysesAnalyses
The profitability ratios for BWBW have ALL been falling since 2001. Each has been below the industryindustry averages for the past three years.
This indicates that COGSCOGS and administrative administrative costscosts may both be too high and a potential problem for BWBW.
Note, this result is consistent with the low interest coverage ratio.
The profitability ratios for BWBW have ALL been falling since 2001. Each has been below the industryindustry averages for the past three years.
This indicates that COGSCOGS and administrative administrative costscosts may both be too high and a potential problem for BWBW.
Note, this result is consistent with the low interest coverage ratio.
58
Summary of Ratio Summary of Ratio AnalysesAnalysesSummary of Ratio Summary of Ratio AnalysesAnalyses
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.
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.
59
Common-size Common-size AnalysisAnalysisCommon-size Common-size AnalysisAnalysis
An analysis of percentage financial statements where all balance
sheet items are divided by total assets and all income statement items are divided by net sales or
revenues.
An analysis of percentage financial statements where all balance
sheet items are divided by total assets and all income statement items are divided by net sales or
revenues.
60
Basket Wonders’ Basket Wonders’ Common Size Balance Common Size Balance SheetsSheets
Basket Wonders’ Basket Wonders’ Common Size Balance Common Size Balance SheetsSheets
Regular (thousands of $) Common-Size (%)
Assets 2001 2002 2003 2001 2002 2003
Cash 148 100 90 12.10 4.89 4.15
AR 283 410 394 23.14 20.06 18.17
Inv 322 616 696 26.33 30.14 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
Other LT 111 223 223 9.08 10.91 10.28
Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0
61
Basket Wonders’ Basket Wonders’ Common Size Balance Common Size Balance SheetsSheets
Basket Wonders’ Basket Wonders’ Common Size Balance Common Size Balance SheetsSheets
Regular (thousands of $) Common-Size (%)
Liab+Equity 2001 2002 2003 2001 2002 2003
Note Pay 290 295 290 23.71 14.43 13.37
Acct Pay 81 94 94 6.62 4.60 4.33
Accr Tax 13 16 16 1.06 0.78 0.74
Other Accr 15 100 100 1.23 4.89 4.61
Tot CL 399 505 500 32.62 24.71 23.05
LT Debt 150 453 530 12.26 22.16 24.44
Equity 674 1,086 1,139 55.11 53.13 52.51
Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0
62
Basket Wonders’ Basket Wonders’ Common Size Income Common Size Income StatementsStatements
Basket Wonders’ Basket Wonders’ Common Size Income Common Size Income StatementsStatements
Regular (thousands of $) Common-Size (%)
2001 2002 2003 2001 2002 2003
Net Sales 1,235 2,106 2,211 100.0 100.0 100.0
COGS 849 1,501 1,599 68.7 71.3 72.3
Gross Profit 386 605 612 31.3 28.7 27.7
Adm. 180 383 402 14.6 18.2 18.2
EBIT 206 222 210 16.7 10.5 9.5
Int Exp 20 51 59 1.6 2.4 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
63
Index AnalysesIndex AnalysesIndex AnalysesIndex Analyses
An analysis of percentage financial statements where all balance sheet or income statement figures for a base
year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their
values in the base year.
An analysis of percentage financial statements where all balance sheet or income statement figures for a base
year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their
values in the base year.
64
Basket Wonders’ Basket Wonders’ Indexed Balance Indexed Balance SheetsSheets
Basket Wonders’ Basket Wonders’ Indexed Balance Indexed Balance SheetsSheets
Regular (thousands of $) Indexed (%)
Assets 2001 2002 2003 2001 2002 2003
Cash 148 100 90 100.0 67.6 60.8
AR 283 410 394 100.0 144.9 139.2
Inv 322 616 696 100.0 191.3 216.1
Other CA 10 14 15 100.0 140.0 150.0
Tot CA 763 1,140 1,195 100.0 149.4 156.6
Net FA 349 631 701 100.0 180.8 200.9
LT Inv 0 50 50 100.0 inf. inf.
Other LT 111 223 223 100.0 200.9 200.9
Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4
65
Basket Wonders’ Basket Wonders’ Indexed Balance Indexed Balance SheetsSheets
Basket Wonders’ Basket Wonders’ Indexed Balance Indexed Balance SheetsSheets
Regular (thousands of $) Indexed (%)
Liab+Equity 2001 2002 2003 2001 2002 2003
Note Pay 290 295 290 100.0 101.7 100.0
Acct Pay 81 94 94 100.0 116.0 116.0
Accr Tax 13 16 16 100.0 123.1 123.1
Other Accr 15 100 100 100.0 666.7 666.7
Tot CL 399 505 500 100.0 126.6 125.3
LT Debt 150 453 530 100.0 302.0 353.3
Equity 674 1,086 1,139 100.0 161.1 169.0
Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4
66
Basket Wonders’ Basket Wonders’ Indexed Income Indexed Income StatementsStatements
Basket Wonders’ Basket Wonders’ Indexed Income Indexed Income StatementsStatements
Regular (thousands of $) Indexed (%)
2001 2002 2003 2001 2002 2003
Net Sales 1,235 2,106 2,211 100.0 170.5 179.0
COGS 849 1,501 1,599 100.0 176.8 188.3
Gross Profit 386 605 612 100.0 156.7 158.5
Adm. 180 383 402 100.0 212.8 223.3
EBIT 206 222 210 100.0 107.8 101.9
Int Exp 20 51 59 100.0 255.0 295.0
EBT 186 171 151 100.0 91.9 81.2
EAT 112 103 91 100.0 92.0 81.3
Cash Div 50 50 50 100.0 100.0 100.0
67
Classification of Classification of Assets:Assets: Intangible Assets Intangible Assets
Intangible assets are long-term assets that have no physical substance but have a value based on the rights or privileges that belong to their owner.
68
Shareholder Value Maximization
Profitability Risk Growth
Profit MarginSales Turnover
Capital MarketConditions
One Useful Framework
Source: Ram Kumar Kakani, ‘Financial Performance and Diversification Strategy of Indian Business Groups’, Indian Institute of Management Calcutta, March 2001.
69
What is Tobin’s Q Ratio?What is Tobin’s Q Ratio?What is Tobin’s Q Ratio?What is Tobin’s Q Ratio?
Ratio of a Value of a Firm to the net Replacement Cost of Firm Assets
So, it also includes intangibles such as brands
Most used and sought after measure in Literature
Calculation is difficult - hence, use Surrogates
Ratio of a Value of a Firm to the net Replacement Cost of Firm Assets
So, it also includes intangibles such as brands
Most used and sought after measure in Literature
Calculation is difficult - hence, use Surrogates
70
FSA of Indian Paper FSA of Indian Paper IndustryIndustry
71
Income Statement: Common Size Analysis
0
10
20
30
40
50
60
APPM Seshasayee Rohit Industry Average
Stocks Consumed
Wages & Salaries
Direct Mfg. Expenses
General Expenses
PBDIT
Interest
Depreciation
72
Balance Sheet - Assets: Common Size Analysis
0
10
20
30
40
50
60
APPM Seshasayee Rohit Industry Average
Cash/Bank
Sundry Debtors
Inventory
Misc. CA
Net FA
Other Assets
73
Balance Sheet - Liabilities: Common Size Analysis
0
10
20
30
40
50
60
APPM Seshasayee Rohit Industry Average
Net Worth
LT Debt
Current Liabilities
74
Financial Ratio Analysis
0
10
20
30
40
50
60
70
80
Return on Equity Current Ratio*10 Debt to Equity Ratio*10 Average CollectionPeriod
Inventory TurnoverRatio
APPM
Seshasayee
Rohit
Industry Average
75
Trend of ROE
-100
-80
-60
-40
-20
0
20
40
60
80
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
APPM
Seshasayee
Rohit
Industry Average
76
Trend of Divident Payout Ratio
-100
-80
-60
-40
-20
0
20
40
60
80
100
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
APPM
Seshasayee
Rohit
Industry Average
77
Trend of Average COllection Period
0
10
20
30
40
50
60
70
80
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
APPM
Seshasayee
Rohit
Industry Average