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Chapter 11 Analysis of Financial Statements

Chapter 11 Analysis of Financial Statements. Financial Statements and Reports. The Income Statement The Balance Sheet Statement of Cash Flows Statement of Retained Earnings. Unilate Textiles: Comparative IS. Unilate Textiles: Comparative BS. Unilate Textiles: Liabilities and Equity.

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Chapter 11 Analysis of Financial Statements

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  1. Chapter 11Analysis of Financial Statements

  2. Financial Statements and Reports • The Income Statement • The Balance Sheet • Statement of Cash Flows • Statement of Retained Earnings

  3. Unilate Textiles: Comparative IS

  4. Unilate Textiles: Comparative BS

  5. Unilate Textiles: Liabilities and Equity

  6. Ratio Analysis • Analysis of a firm’s ratios is generally the first step in financial analysis. • Ratios are designed to show relationships between financial statement accounts within firms and between firms.

  7. What is the Purpose of Ratio Analysis? • Give idea of how well the company is doing • Standardize numbers; facilitate comparisons • Used to highlight weaknesses and strengths

  8. What Are the Five Major Categories of Ratios?What Questions Do They Answer? • Liquidity: Can we make required payments in the current period? • Asset mgt.: Right amount of assets vs. sales? • Debt mgt.: Right mix of debt and equity? • Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? • Market values: Do investors like what they see as reflected in P/E and M/B ratios?

  9. Industry Average Data

  10. Current Ratio = Current Assets Current Liabilities $465.0 $130.0 = = 3.6 times Industry average = 4.1 times What is Unilate’sCurrent Ratio?

  11. Quick Ratio = Current Assets- Inventories Current Liabilities $195.0 $130.0 $465.0 - $270.0 $130.0 = = = 1.5 times Industry average = 2.1 times What is Unilate’sQuick, or Acid Test, Ratio?

  12. Unilate’s Liquidity Position • Ratios is slightly below industry average. • Inventories are the least liquid of Unilate’s assets and they are the assets that suffer losses in the event of a forced sale. • The quick ratio shows that, if receivables are collected in full, Unilate can payoff its current liabilities without having to liquidate its inventory.

  13. 4.6 . 6 times $1,230.0 = = $270.0 Industry average = 7.4 times What is Unilate’s Inventory Turnover Ratio? • Compares poorly with industry • May be holding excess inventories • May be holding old/obsolete inventory.

  14. Industry average = 32.1 days What is Unilate’s Days Sales Outstanding Ratio?

  15. $1,500.0 = = 3.9 times $380.0 Industry Average 4.0 times = What is Unilate’s Fixed Assets Turnover Ratio?

  16. $1,500.0 = 1.8 times = $845.0 Industry Average 2.1 times = What is Unilate’s Total Assets Turnover Ratios? • TA turnover is below industry average. • Unilate might have excess inventories & receivables.

  17. Debt Ratio = Total debt Total assets $430.0 $130.0 . + $300.0 . = = 0.509 = 50.9% = $845.0 $845.0 Industry Average = 45.0% Calculate the Debt Ratio

  18. TIE = EBIT Interest charges $130.0 3.3 times = = $40.0 Industry Average = 6.5 times Calculate the Times-Interest-Earned Ratio

  19. Calculate theFixed Charge Coverage Ratio Industry Average = 5.8x All three previous ratios reflect use of debt, but focus on different aspects.

  20. $54.0 $1,500 = = 0.036 = 3.6% Industry Average = 4.7% Unilate’s Profitability Ratios--Profit Margin, ROA, and ROE

  21. = 0.064 = 6.4% $54.0 $845.0 = = $54.0 $415.0 - 0 = 0.130 = 13.0% Industry Average = Industry Average = 12.6% 17.2% Unilate’s ROA, and ROE

  22. $23.00 10.6 times = = $2.16 Industry Average = 13.0 times Unilate’s Market Value Ratios Price/Earnings Ratio

  23. 1.4 times $23.00 $16.00 = = Industry Average = 2.0 times Unilate’s Market Value Ratios Market/Book Ratio

  24. ROA = Net Profit Margin X Total Assets Turnover Sales Total Assets Net Income Sales X = $54.0 $1,500.0 X $1,500.0 $845.0 = = 3.6% X 1.8 = 6.4% Summary of Ratio Analysis:The DuPont Equation

  25. DuPont Equation Provides Overview • Firm’s profitability (measured by ROA) • Firm’s expense control (measured by profit margin) • Firm’s asset utilization (measured by total asset turnover)

  26. Limitations of Ratio Analysis? • Comparison with industry averages is difficult if the firm operates many different divisions. • “Average” performance not necessarily good. • Inflation distorts balance sheets. • Seasonal factors can distort ratios. • “Window dressing” techniques can make statements and ratios look better. • Different operating and accounting practices distort comparisons. • Sometimes hard to tell if a ratio is “good” or “bad” • Difficult to tell whether company is, on balance, in strong or weak position

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