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Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financia l Statemen t Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting

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Page 1: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Financial Statement Analysis

© The McGraw-Hill Companies, Inc., 1999

13Part One: Financial Accounting

Page 2: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

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Return on Assets (ROA) Slide 13-1

Return on assets =Net income + Interest (1 - Tax rate)

Total assets

Return on assets =$680.7 + $33.3(.66)

$4,237.1

Return on assets = 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.

Return on assets (ROA) reflects how much the firm has earned on the investment of all the financial resources committed to the firm.

Page 3: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

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Return on Invested Capital Slide 13-2

Return on invested capital focuses more on the use of permanent capital (noncurrent liabilities

plus shareholders’ equity)

Return on invested capital focuses more on the use of permanent capital (noncurrent liabilities

plus shareholders’ equity)

Return on invested capital =$680.7 + $33.3(.66)

$1,309.1 + $1,713.4

Return on invested capital = 23.2 percent

Return on invested capital =Net income + Interest (1 - Tax rate)

Long-term liabilities + Shareholders’ equity

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Return on Shareholders’ Equity Slide 13-3

Return on shareholders’ equity (ROE) reflects how much the firm has earned on the funds

invested by the shareholders.

Return on shareholders’ equity (ROE) reflects how much the firm has earned on the funds

invested by the shareholders.

Return on shareholders’ equity =Net income

Shareholders’ equity

Return on shareholders’ equity =$680.7

$1,713.4

Return on shareholders’ equity = 39.7 percent

Page 5: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

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Return on Investment Slide 13-4

Net income Sales

Sales Investment*

profit margin or return on sales

turnover

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Price/Earnings Ratio (P/E) Slide 13-5

Price/earnings ratio =Market price per share

Net income per share

Price/earnings ratio =$65.375

$2.94

Price/earnings ratio = 22 times

The price/earnings ratio (P/E) is the best indicator of how investors judge

the firm’s future performance.

The price/earnings ratio (P/E) is the best indicator of how investors judge

the firm’s future performance.

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Gross Margin Percentage Slide 13-6

Gross margin percentage =Gross margin

Net sales revenues

Gross margin percentage =$3,306.4

$6,295.4

Gross margin percentage = 52.5 percent

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Profit Margin Slide 13-7

Profit margin =Net income

Net sales revenues

Profit margin =$680.7

$6,295.4

Profit margin = 10.8 percent

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Earnings Per Share Slide 13-8

Earnings per share =Net income

Number of shares of common stock

outstanding

Earnings per share =$680.7

231.5

Earnings per share = $2.94

Page 10: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

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Asset Turnover Slide 13-9

Asset turnover =Sales revenue

Total assets

Asset turnover = 1.5 times

$6,295.4

$4,237.1Asset turnover =

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Investment Capital Turnover Slide 13-10

Invested capital turnover =Sales revenue

Invested capital

1.5 times Invested capital turnover =

$6,295.4

$4,237.1Invested capital turnover =

Page 12: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

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Equity turnover =Sales revenue

Shareholders’ equity

Equity turnover = 3.7 times

EquityTurnover Slide 13-11

$6,295.4

$1,713.4Equity turnover =

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

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Capital Intensity Slide 13-12

Capital intensity =Sales revenue

Property, plant, and equipment

Capital intensity =$6,295.4

$2,768.4

Capital intensity = 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.

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.

Page 14: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

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Working Capital Turnover Slide 13-13

Working capital turnover =Sales revenue

Working capital

Working capital is current assets minus current liabilities

Working capital is current assets minus current liabilities

Working capital turnover =$6,295.4

$30.5

Working capital turnover = 206 times

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Days’ Payables Slide 13-14

Days’ payablesOperating payables

Pretax cash expenses/365=

Days’ payables$760.5

$4,996.1/365=

$308.8 + $76.5 + $233.8 + $141.4

$308.8 + $76.5 + $233.8 + $141.4

Days’ payables = 56 days

Operating payables include accounts payable, accrued wages and payroll taxes, and other items that represent

deferred payments for operating expenses.

Operating payables include accounts payable, accrued wages and payroll taxes, and other items that represent

deferred payments for operating expenses.

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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

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

Cash Conversion Cycle Slide 13-15

Days

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.

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.

Page 17: Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., 1999 13 Part One: Financial Accounting.

Irwin/McGraw-Hill

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Dividend Yield Slide 13-16

Dividend yield =Dividends per share

Market price per share

Dividend yield =$1.32

$65.375

Dividend yield = 2.0 percent

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Dividend Payout Slide 13-17

Dividend payout =$305.2

$680.7

Dividend payout =Dividends

Net income

Dividend payout = 45 percent

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Other Key Ratios Slide 13-18

Days’ cash

Cash

Cash expenses/365

Days’ receivables

Accounts receivable

Sales/365

Days’ inventory

Inventory

Cost of sales/365

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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

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Irwin/McGraw-Hill

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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

Interest

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Chapter 13

The End


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