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Financial Statement Analysis
© The McGraw-Hill Companies, Inc., 1999
13Part One: Financial Accounting
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© The McGraw-Hill Companies, Inc., 1999
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.
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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
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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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© The McGraw-Hill Companies, Inc., 1999
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
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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 =
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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 =
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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.
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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.
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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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© The McGraw-Hill Companies, Inc., 1999
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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© The McGraw-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
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© The McGraw-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
Interest
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Chapter 13
The End
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