Chapter 9 The Analysis of the Balance Sheet and the Income Statement.
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Transcript of Chapter 9 The Analysis of the Balance Sheet and the Income Statement.
Chapter 9Chapter 9
The Analysis of the Balance Sheet and the Income
Statement
The Analysis of the Balance Sheet The Analysis of the Balance Sheet and the Income Statementand the Income Statement
Chapter 8 reformulated the statement of owners’ equity.
Link to Previous Chapter
This chapter continues the reformulation and analysiswith the balance sheet and
income statement.The reformulation follows the
design in Chapter 7.
This Chapter
Chapters 10 reformulates the cash flow statement.
Link to Next Chapter
More applications and discussion are on the web page.
Link to Web Page
What assets and liabilities are classified as operating ? As financing ?
What items in the income
statement are classified as
operating ? As financing ?
How are taxes allocated to the operating and
financing components of
the income statement ?
What ratios are calculated
from reformulated statements ?
What do they mean ?
What you will learn from this What you will learn from this chapterchapter
• Why reformulated income statements and balance sheets are desirable
• How knowledge of the business is incorporated in reformulated statements
• How operating and financing components of the two statements are identified
• Which assets and liabilities typically fall into operating and financing categories
• Why income taxes are allocated to different parts of the income statement
• What balance sheet and income statement ratios reveal
Analysis of Balance Sheet and Analysis of Balance Sheet and Income Statement: the StepsIncome Statement: the Steps
1. Reformulate to distinguish between operating and financing activities
2. Carry out common size and trend analysis
3. Calculate balance sheet and income statement ratios
The Standard Balance SheetThe Standard Balance Sheet
Reformulating the Balance Sheet: Reformulating the Balance Sheet:
The Governing Accounting The Governing Accounting RelationsRelations
Net Operating Assets (NOA)
= Operating Assets (OA) – Operating
Liabilities (OL)
Net Financial Obligations (NFO)
= Financial Obligations (FO) – Financial
Assets (FA)
Common Shareholders’ Equity (CSE)
= NOA – NFO
The Typical Reformulated The Typical Reformulated Balance SheetBalance Sheet
Assets Liabilities and Stockholders’ Equity
Financial assets: Financial liabilities: - Cash equivalents - Short-term borrowings - Short-term investments - Current maturities of long-term debt - Short-term notes receivable (?) - Short-term notes payable (?) - Long-term non-marketable - Long-term borrowing (bank loans, debt investments bonds, payable, notes payable) - Long-term marketable - Lease obligations debt securities - Preferred stock Operating assets: Operating liabilities: all else all else Common equity
Issues in Reformulating Balance Issues in Reformulating Balance SheetsSheets
• Cash: working cash and excess cash
• Short term notes receivable: trade receivables or
investment of cash?
• Finance receivables: an operating asset
• Debt investments: financial assets
• Short-term equity investments: excess cash or trading
securities?
• Short-term notes payable: trade notes or borrowing?
• Lease assets: operating assets
• Lease liabilities: financial obligation
• Deferred tax assets and liabilities: operating
• Deferred revenues and accrued expenses: operating
• Minority interest: not a financial obligation
• For financial firms, many “financial items” are
operating assets and liabilities
Nike, Inc.: GAAP Balance Sheet Nike, Inc.: GAAP Balance Sheet (1)(1)
May 31,2004 2003
Current Assets:Cash and cash equivalents 828.0 634.0 Short-term investments 400.8 -Accounts receivables, less allowance for doubtful 2,120.2 2,083.9 accounts of $95.3 and $81.9Inventories (Note 2) 1,633.6 1,514.9 Deferred income taxes (Note 8) 165.0 221.8 Prepaid expenses and other current assets 364.4 332.5
Total current assets 5,512.0 4,787.1
Property, plant and equipment, net (Note 3) 1,586.9 1620.8Identifiable intangible assets, net (Note 4) 366.3 118.2Goodwill (Note 4) 135.4 65.6Deferred income taxes and other assets (Note 8) 291.0 229.4
Total assets 7,891.6 6,821.1
(In millions)ASSETS
Nike, Inc.: GAAP Balance Sheet Nike, Inc.: GAAP Balance Sheet (cont.)(cont.)
May 31,2004 2003
Current Liabilities:Current portion of long-term debt (Note 7) 6.6 205.7
Notes payable (Note 6) 146.0 75.4
Accounts payable (Note 6) 763.8 572.7
Accrued liabilities (Notes 5 and 16) 974.4 1,036.2
Income taxes payable 118.2 130.6
Total current liabilities 2,009.0 2,020.6
Long-term debt (Note 7) 682.4 551.6
Deferred income taxes and other liabilities 418.2 257.9
(Note 8)Commitments and contingencies (Notes 14 and 16) - -
Redeemable Preferred Stock (Note 9) 0.3 0.3
Shareholders Equity:Common Stock at stated value (Note 10):Class A convertible - 77.6 and 97.8 shares outstanding 0.1 0.2
Class B - 185.5 and 165.8 shares outstanding 2.7 2.6
Capital in excess of stated value 887.8 589.0
Unearned stock compensation (5.5) (0.6)
Accumulated other comprehensive loss (Note 13) (86.3) (239.7)
Retained earnings 3,982.9 3,639.2
Total shareholders equity 4,781.7 3,990.7
Total liabilities and shareholders equity 7,891.30 6,820.80
LIABILITIES AND SHAREHOLDERS EQUITY(In millions)
Nike, Inc.: Nike, Inc.: Reformulated Balance SheetsReformulated Balance Sheets
2004 2003 2002Net Operating Assets Operating Assets:
Operating cash1 61 53 49 Account receivables (less doubtful accounts 2,120 2,084 1,807
of $95, $82, and $77) Inventories 1,634 1,515 1,384
Prepaid expenses6 370 333 261 Property, plant and equipment (net) 1,587 1,621 1,615 Goodwill 135 66 174 Trademarks and other intangibles 400 140 283 Accumulated amortization (34) 366 (22) 118 (19) 264 Deferred income taxes and other assets 456 451 374
6,728 6,241 5,928
Operating Liabilities:
Accounts payable-non-interest bearing2 720 523 468
Accrued liabilities3 921 999 768Income taxes payable 118 131 83Deferred income taxes 418 258 142
2,177 - 1,911 1,4614,551 4,330 4,467
Net Financial Obligations
Cash equivalents1 (767) (581) (527) Short-term investments (401) Current portion of long-term debt 7 206 55
Notes payable4 146 75 425
Accounts payable-interesting bearing2 44 50 36 Long-term debt 682 552 626
Redeemable preferred stock5 - (289) - 302 - 615Common Stockholders' Equity6 4,840 4,028 3,852
1Cash and cash equivalents are split between operating cash and cash investments. Operating cash is estimatedat 1/2 percent of sales2Some accounts payable are interst bearing. These are classified as financing obligations.
4Notes payable are interest bearing5Preferred stock is less than $0.5 million6Unearned compensation is excluded from equity and included in prepaid expenses.
Some items may not total precisely due to rounding error
3Accured expenses exclude dividends payable (now included in equity)
Reebok: GAAP Balance Sheet Reebok: GAAP Balance Sheet (1)(1)
December 31 -------------------------------------- 2004 2003
---------------- ---------------- Amounts in thousands, except per share data Assets Current assets: Cash and cash equivalents $ 565,233 $ 693,599 Accounts receivable, net of allowance for 660,599 532,320 doubtful accounts (2004, $81,280; 2003, $70.823) Inventory 458,435 352,692 Deferred income taxes 111,516 100,070 Prepaid expenses and other current assets 61,730 48,169 ----------- ------------ Total current assets 1,857,513 1,726,850 ----------- ------------ Property and equipment, net 183,799 149,765 Other non-current assets: Goodwill, net 124,125 24,690 Intangibles, net of amortization 196,138 42,296 Deferred income taxes 44,892 22,478 Other 34,161 23,663 -------------- -------------- Total Assets $ 2,440,628 $ 1,989,742 -------------- --------------
Reebok: GAAP Balance Sheet Reebok: GAAP Balance Sheet (cont.)(cont.)
December 31 ------------------------------------ 2004 2003 ---------------- -------------- Amounts in thousands, except per share data Liabilities and Stockholders' Equity Current liabilities: Notes payable to banks $ 63,179 $ 8,055 Current portion of long-term debt 100,627 163 Accounts payable 183,853 155,904 Accrued expenses 386,725 374,849 Income taxes payable 71,930 27,017 ----------- ----------- Total current liabilities 806,314 565,988 ----------- ----------- Long-term debt, net of current portion 360,126 353,225 Minority interest 8,514 11,657 Other long-term liabilities 45,718 25,162 Commitments and contingencies
Stockholders' equity: Common stock, par value $.01; authorized 250,000 shares; 1.018 1.011 issued shares: 101,827 in 2004; 101,081 in 2003 Retained earnings 1,985,324 1,796,321 Less shares in treasury at cost: 42,619 in 2004; 41,473 in 2003 (780,510) (740,189) Unearned compensation (5,804) (1,225) Accumulated other comprehensive income (expense) 19,928 (22,208) ------------- ------------- Total Stockholders' Equity 1,219,956 1,033,710 ------------- -------------Total Liabilities and Stockholders' Equity $ 2,440,628 $ 1,989,742 -------------- --------------
Reebok: Reformulated Balance Reebok: Reformulated Balance SheetSheet
Microsoft Corporation: Microsoft Corporation: Reformulated Balance SheetReformulated Balance Sheet
1 Cash and cash equivalents split between working cash and financial assets. 2 Convertible debt of AT&T Corp. in connection with investment in broadband.
Year ending June 30 2002 2001 Net Operating Assets Operating assets:
Working cash1 $ 50 $ 50
Account receivable, net 5,129 3,671 Inventories 673 83 Deferred income taxes 2,112 1,522 Property and equipment, net 2,268 2,309 Equity investments 9,151 8,780 Convertible preferred debt2 3,036 3,925 Goodwill 1,426 1,511 Intangible assets, net 243 401 Other assets 2,952 3,372
27,040 25,624 Operating liabilities
Accounts payable 1,208 $ 1,188 Accrued compensation 1,145 742 Income taxes payable 2,022 1,468 Unearned revenue 7,743 5,614 Preferred income taxes 398 409 Other liabilities 2,950 15,466 2,120 11,541
11,574 14,083 Net financial assets
Cash equivalents 2,966 3,872 Short-term investments 35,636 27,678 Long-term debt investments 2,004 40,606 1,656 33,206
Common Stockholders’ Equity 52,180 47,289
The Standard Income The Standard Income StatementStatement
The Reformulated Income The Reformulated Income Statement (1)Statement (1)
1. Operating items are separated from financing items. 2. Operating income from sales is separated from other operating income.3. Tax is allocated to components of the statement, with no allocation to items
reported on an after-tax basis
Reformulated Comprehensive Income Statement
Net sales– Expenses to generate salesOperating income from sales (before tax)– Tax on operating income from sales + Tax as reported + Tax benefit from net financial expenses – Tax allocated to other operating incomeOperating income from sales (after tax)±Other operating income (expense) requiring tax allocation Restructuring charges and asset impairments Merger expenses Gains and losses on asset sales Gains and losses on security transactions − Tax on other operating income± After-tax operating items Equity share in subsidiary income Operating items in extraordinary income Dirty-surplus operating items in Table 8.1 Hidden-dirty surplus operating itemsOperating income (after tax)
The Reformulated Income The Reformulated Income Statement (2)Statement (2)
continued… - Net financial expenses after tax + Interest expense - Interest revenue = Net interest expense before tax + Tax benefit from net interest expenses = Net interest expenses after tax Gains and losses on debt retirement. Realized gains and losses on financial assets Dirty surplus financial items in Table 8.1 Hidden dirty surplus financial items + Preferred dividends Gains and losses on redemption of preferred stock
- Tax benefit from preferred dividends (if any) - Minority Interest
= Comprehensive Income to Common
The Allocation of TaxesThe Allocation of Taxes
• In the income statement only one tax number is reported: It must be allocated to the operating and financial components to put both on an after-tax basis
• First, calculate the tax benefit (tax shield) provided by deducting interest expense
where t is the marginal (not effective) tax rate.
(The statutory rate is usually the marginal rate)
• From the operating income deduct both the total tax and the tax benefit, to capture what the operating income would have been, after tax, had there been no financing activities
• To the net financial expense add the tax benefit, because its net effect is attributable to the financing activities
tExpenseInterest Net BenefitTax
Top-down and Bottom-up Methods Top-down and Bottom-up Methods for Tax Allocation: Tax Rate = 35%for Tax Allocation: Tax Rate = 35%
GAAP Top-down Bottom-upIncome Statement Tax Allocation Tax
Allocation Revenue $4,000Operating expenses (3,400)Interest expense (100)Income before tax 500Income tax expense (150)Net income $ 350
Revenue $4000Operating expenses (3,400)Operating income before tax 600Tax expense:
Tax reported $150 Tax benefit for interest 35 (185) ($100 x 0.35)
Operating income after tax $ 415
Net income $350Interest expense $100Tax benefit 35
65Operating income after tax
$415
Additional Tax Allocation within Additional Tax Allocation within OperationsOperations
• Allocate taxes between operating income from sales and other operating income (not from sales) so that both are after tax.
• Remember: some other operating income items are after tax (if they appear below the tax line on the GAAP statement)
• Remember: losses draw negative tax
Starting Point for Income Statement Starting Point for Income Statement Reformulation: Identify Comprehensive Reformulation: Identify Comprehensive Income from Equity StatementIncome from Equity Statement
Nike Reebok
Balance May 31, 2003 $4,028 $1,035
Transactions with shareholders:
Shares issued, at market $388 $83 Shares repurchased (416) (88) Common dividends (179) (207) (18)
(23)
Comprehensive income Net income reported $946 $192
Currency translation gain 28 38Gains on hedging instruments 126 4Loss on option exercise $127 $32 Tax benefit (47) (80) 1,019 12 (20) 214
Balance May 31, 2004 $4,840
$1,226
Nike, Inc; GAAP Income Nike, Inc; GAAP Income StatementStatement
2004 2003 2002
Revenues $ 12,253.1 $ 10,697.0 $ 9,893.0Cost of sales 7,001.4 6,313.6 6,004.7Gross Margin 5,251.7 4,383.4 3,888.3Selling and administrative 3,702.0 3,154.1 2,835.8Interest expense, net (Notes 6 and 7) 25.0 28.8 34.0Other expense, net (Note 16) 74.7 77.5 1.2
Income before income taxes and cumulative effect of accounting on change
1,450.0 1,123.0 1,017.3
Income taxes (Note 8) 504.4 382.9 349.0
Income before cumulative effect of accounting change 945.6 740.1 668.3Cumulative effect of accounting change net of income taxes of ($-. $- and $3.0) (Note 4, Note 1) - 266.1 5.0Net Income $ 945.6 $ 474.0 $ 663.3Basic earnings per common share - before accounting change (Notes 1 and 11) $ 3.59 $ 2.80 $ 2.50Cumulative effect of accounting change - 1.01 0.02
$ 3.59 $ 1.79 $ 2.48
Diluted earnings per common share - before accounting change (Notes 1 and 11) $ 3.51 $ 2.77 $ 2.46Cumulative effect of accounting change - 1.00 0.02
$ 3.51 $ 1.77 $ 2.44
Year Ended May 31,
(In millions, except per share data)
Nike Inc.: Reformulated Income Nike Inc.: Reformulated Income StatementStatement
Reebok: GAAP Income Statements Reebok: GAAP Income Statements
Reebok: Reformulated Income Reebok: Reformulated Income StatementsStatements
2004 2003 2002
Operating Revenues 3,785 3,485 3,128 Cost of sales 2,287 2,147 1,930
Gross margin 1,498 1,338 1,198 Operating expenses
Administrative expenses 1,067 936 851 Advertising 137 150 131 Other expenses 5 1,209 1 1,087 6 988
Operating income from sales (before tax) 289 251 210 Taxes
Tax as reported 68 72 61 Tax on financial items 5 73 6 78 5 66
Operating income from sales (after tax) 216 173 144 Other operating income (net-of-tax items):Currency translations gains 38 49 37 Loss on derivative employee stock option (20) (17) (7) Derivative gains and losses in equity statement 4 (14) (23) Effect of accounting change 22 18 (5) 2
Operating income (after tax) 237 191 146
Financing expense (Income)Interest expense 26 26 24 Interest income (13) 13 (8) 18 (9) 15
Tax effect (5) (6) (5)
Net interest expense 8 12 10 Loss on retirement debt (10)
(18) 12 10
Comprehensive income before minority interest 219 179 136 Minority interest 5 5 3 Comprehensive income to common 214 174 133
1Broken out from selling and administrative expenses in published income statement.2Marginal tax rate was 35.9%, 35.9% and 35.5% for 2004, 2003 and 2002, respectively, including both federal and state taxes.
Track Nike on BYOAPTrack Nike on BYOAP
2002 2001 2000 1999 1998 1997 1996 Sales 9,893 9,489 8,995 8,777 9,553 9,187 6,471 Operating income (after tax)
620 577 557 449 410 797 549
Comprehensive income
599 549 537 430 384 777 535
Net operating assets 4,460 4,517 4,402 3,993 4,042 3,674 2,659 Net financial obligations
616 1,022 1,254 658 780 518 228
Common shareholders’ equity
3,844 3,495 3,148 3,335 3,262 3,156 2,431
Microsoft Corporation: Microsoft Corporation: GAAP Income StatementsGAAP Income Statements
Year Ended June 30 2002 2001 _________________________________________________________________________________________ Revenue $ 28,365 $ 25,296 Operating expenses: Cost of revenue 5,191 3,455 Research and development 4,307 4,379 Sales and marketing 5,407 4,885 General and administrative 1,550 857 -------------------------------------------------------- - ------ - - - Total operating expenses 16,455 13,576 -------------------------------------------------------- - ------ - - -
Operating income 11,910 11,720 Losses on equity investees and other (92) (159) Investment income(loss) (305) (36) -------------------------------------------------------- - ------ - - - Income before income taxes 11,513 11,525 Provision for income taxes 3,684 3,804 -------------------------------------------------------- - ------ - - -
Income before accounting change 7,829 7,721 Cumulative effect of accounting change (net of tax) (375) -------------------------------------------------------- - ------ - - - Net income $ 7,829 $ 7,346 __________________________________________________________________________________
Microsoft Corporation: Microsoft Corporation: Reformulated Income StatementsReformulated Income Statements
Year ended June 2002 2001 Revenue $ 28,365 $ 25,296 Operating expenses:
Cost of revenue 5,191 3,455 Research and development 4,307 4,379 Sales and marketing 5,407 4,885 General and administrative 1,550 857
16,455 13,576 Operating income from sales, before tax 11,910 11,720 Tax as reported $ 3,684 $ 3,804 Tax on other operating income 872 756 Tax on financing income (758) 3,798 (743) 3,817 Operating income from sales, after tax 8,112 7,903
Investment income in income statement:1 Dividends 357 377 Realized gains on sales of investments 2,121 3,003 Permanent impairment of investments (4,323) (4,804) Unrealized losses on derivatives (480) (2,325) (592) (2,016) Tax on investment income (at 37.5%)2 872 756
(1,453) (1,260) Investment income in equity statement (after tax):
Unrealized loss on convertible debt -- (829) Gains (losses) on derivatives (91) 634 Unrealized losses on equity investments (281) (707) Total investment income (1,825) (2,162) Losses in equity subsidiaries (92) (159) Currency translation and other 82 (39) Cumulative effect of accounting change -- (450)
Total other income (1,835) (2,810) Total operating income 6,277 5,093 Net financing income
Interest income3 1,762 1,808 Realized gains on short-term investments 258 172 2,020 1,980 Tax at 37.5%4 758 743 1,262 1,237 Financing income in equity statement (after tax):
Unrealized gain on financial assets 286 76 Total financing income 1,548 1,313 Comprehensive income 7,825 6,406 1 Included in investment income is the GAAP statement; details from footnotes.
2 Losses on investments draw a tax deduction. 3 Interest income is included in investment income in the GAAP statement. 4 With net financing income, financing activities draw further taxes rather than a tax benefit.
Common Size AnalysisCommon Size Analysis
Comparison to other firms is called cross-sectional analysis
Common size analysis gives a ready comparison:
• The Income Statement
– Each item/Total revenues
• The Balance Sheet
– Operating items/Totals
– Financing items/Totals
Common Size Analysis : Nike Common Size Analysis : Nike and Reebok Income Statementsand Reebok Income Statements
Nike Reebok $ % $ % Revenue 12,253 100.0 3,785 100.0
Cost of sales 7,001 57.1 2,287 60.4 Gross margin 5,252 42.9 1,498 39.6
Operating expenses
Administrative 2,312 18.9 1,067 28.4 Advertising 1,378 11.2 137 3.6 Amortization and other 87 0.7 5 0.1
Operating income from sales (before tax)
1,474 12.0 289 7.6
Tax on operating income from sales 513 4.2 73 1.9 Other operating income from sales (after tax)
961 7.8 216 5.7
Other operating income 74 0.6 22 0.5 Operating income 1,035 8.4 237 6.3 Net financing expense (income) 16 0.1 18 0.5 Comprehensive income to common 1,019 8.3 214 5.7
Common Size Analysis: Nike Common Size Analysis: Nike and Reebok Balance Sheetsand Reebok Balance Sheets
Nike Reebok Operating assets
$ % $ %
Cash 61 0.9 19 1.0 Accounts renewable 2,120 31.5 661 34.8 Inventories 1,634 24.3 458 24.1 Prepaid expenses 370 5.5 68 3.6 Property, plant and equipment 1,587 22.6 184 9.7 Goodwill 135 2.0 124 6.5 Trademarks and other intangibles 400 5.9 200 10.5 Accumulated amortization (34) (0.5) (4 (0.2) Deferred taxes and other assets 456 6.8 190 10.0
6,729 100.0 1,900 100.0 Operating liabilities
Accounts payable 720 33.1 184 26.7 Accrued liabilities 921 42.3 387 56.3 Income taxes payable 118 5.4 72 10.7 Deferred taxes and other 418 19.2 46 6.7
2,177 100.0 688 100.0 Net operating assets 4,551 1,212
Common Size Analysis: Nike Common Size Analysis: Nike and Reebok Balance Sheetsand Reebok Balance Sheets
Nike Reebok Operating assets
$ % $ %
Cash 61 0.9 19 1.0 Accounts renewable 2,120 31.5 661 34.8 Inventories 1,634 24.3 458 24.1 Prepaid expenses 370 5.5 68 3.6 Property, plant and equipment 1,587 22.6 184 9.7 Goodwill 135 2.0 124 6.5 Trademarks and other intangibles 400 5.9 200 10.5 Accumulated amortization (34) (0.5) (4 (0.2) Deferred taxes and other assets 456 6.8 190 10.0
6,729 100.0 1,900 100.0 Operating liabilities
Accounts payable 720 33.1 184 26.7 Accrued liabilities 921 42.3 387 56.3 Income taxes payable 118 5.4 72 10.7 Deferred taxes and other 418 19.2 46 6.7
2,177 100.0 688 100.0 Net operating assets 4,551 1,212
Trend Analysis: Nike, Inc.Trend Analysis: Nike, Inc.
2004 2003 2002 2001 2000 Base in 1999 ($
millions) Sales 139.6 121.9 112.7 108.1 102.5 8,777 Cost of sales 127.4 114.9 109.3 105.3 98.4 5,494 Gross margin 160.0 133.5 118.4 112.8 109.4 3,283 Operating expenses 153.5 131.3 115.3 111.3 107.4 2,461 Operating income from sales (before tax) 179.3 140.1 127.9 117.5 115.3 822 Operating income from sales (after tax) 193.0 152.2 138.4 124.1 119.9 498 Operating income 202.4 192.4 147.9 128.5 124.1 449 Comprehensive income to common 237.0 94.2 139.3 127.6 124.9 430
Balance Sheet
Accounts receivable 137.7 153.3 117.3 105.3 101.8 1,540 Inventories 139.5 129.4 117.3 121.6 123.5 1.171 Property, plant and equipment 1,266 Operating assets 132.0 122.4 116.1 109.8 111.4 5,094 Accounts payable 151.9 110.3 98.7 91.1 114.8 474 Accrued liabilities 166.5 180.7 138.9 85.4 112.5 553 Operating liabilities 196.7 172.6 132.0 92.9 115.3 1,107 Net operating assets 114.0 108.5 111.7 114.6 110.3 3,992 Net financial obligations -43.9 45.9 93.6 162.5 191.6 658 Common shareholders’ equity 145.1 120.8 115.3 105.1 94.4 3,335
Income Statement RatiosIncome Statement Ratios
• Revenue composition ratios– Operating Revenue Composition Ratio:
– Financial Income Composition Ratio:
• Profit margin ratios
– Operating Profit Margin:
– Sales Profit Margin:
– Other Items Profit Margin:
Income Statement Ratios Income Statement Ratios (cont.)(cont.)
• Profit Margin Ratios (cont.)
– Financial Income Contribution Ratio:
– Net Income Profit Margin
• Expense Ratios
– Expense Ratio
– 1 - Sales PM = Sum of Expense Ratios
SalesIncome FinancialNet
SalesIncomeNet iveComprehens
SalesActivityan for Expense
Balance Sheet RatiosBalance Sheet Ratios
• Composition Ratios
– Operating Asset Composition Ratio
– Operating Liability Composition Ratio
– Financial Asset Composition Ratio
– Financial Liability Composition Ratio
Assets Operating TotalAsset Operating
sLiabilitie Operating TotalLiability Operating
Assets Financial TotalAsset Financial
sObligation Financial Total
Obligation Financial
Balance Sheet Leverage RatiosBalance Sheet Leverage Ratios
• Financial Leverage Ratios
– Capitalization Ratio:
– Financial Leverage Ratio (FLEV)
It is always the case that Capitalization Ratio - Leverage Ratio = 1.0 • Operating Liability Leverage Ratio
Operating Liability Leverage (OLLEV)
CSENOA
CSENFO
Assets OperatingNet
sLiabilitie Operating
Growth RatiosGrowth Ratios
G r o w t h R a t e i n S a l e s = Sales sPeriod'Prior
Salesin Change
G r o w t h R a t e i n O p e r a t i n g I n c o m e = OI sPeriod'Prior
Tax)(after Income Operatingin Change
G r o w t h i n N O A = NOA Beginning
Assets OperatingNet in Change
G r o w t h i n C S E = CSE Beginning
CSEin Change
Summary Profitability Summary Profitability MeasuresMeasures
Operating Profitability:
Financing Profitability:
All measures are after tax.
1tt
t
t
NOANOA21
OIRNOA
1tt
t
t
NFONFO21
NFENBC
o r
1tt
t
t
NFANFA21
NFIRNFA
Financial Statement Analysis Financial Statement Analysis ProceduresProcedures
1. Reformulate the statement of stockholders’ equity on clean surplus basis (Chapter 8)
2. Calculate comprehensive rate of return on common equity, ROCE, from reformulated statement of common stockholders’ equity (Chapter 8)
3. Reformulate the balance sheet to distinguish operating and financial assets and obligations
4. Reformulate the income statement on clean surplus basis and distinguish operating and financing income
5. Compare reformulated balance sheets and income statements with reformulated statements of comparison firms and over time through a common size analysis and a trend analysis
6. Calculate balance sheet and income statement ratios
7. Carry out the analysis of ROCE: Chapter 11
8. Carry out the analysis of growth: Chapter 12
Reebok: Reformulated Income Reebok: Reformulated Income StatementsStatements
2004 2003 2002
Operating Revenues 3,785 3,485 3,128 Cost of sales 2,287 2,147 1,930
Gross margin 1,498 1,338 1,198 Operating expenses
Administrative expenses 1,067 936 851 Advertising 137 150 131 Other expenses 5 1,209 1 1,087 6 988
Operating income from sales (before tax) 289 251 210 Taxes
Tax as reported 68 72 61 Tax on financial items 5 73 6 78 5 66
Operating income from sales (after tax) 216 173 144 Other operating income (net-of-tax items):Currency translations gains 38 49 37 Loss on derivative employee stock option (20) (17) (7) Derivative gains and losses in equity statement 4 (14) (23) Effect of accounting change 22 18 (5) 2
Operating income (after tax) 237 191 146
Financing expense (Income)Interest expense 26 26 24 Interest income (13) 13 (8) 18 (9) 15
Tax effect (5) (6) (5)
Net interest expense 8 12 10 Loss on retirement debt (10)
(18) 12 10
Comprehensive income before minority interest 219 179 136 Minority interest 5 5 3 Comprehensive income to common 214 174 133
1Broken out from selling and administrative expenses in published income statement.2Marginal tax rate was 35.9%, 35.9% and 35.5% for 2004, 2003 and 2002, respectively, including both federal and state taxes.