Chapter 3 Working With Financial Statements 0
0 Chapter 3 Working With Financial Statements
Chapter Outline Standardized Financial Statements Ratio Analysis ■The Du Pont Identity Internal and Sustainable Growth Using Financial Statement Information
1 Chapter Outline n Standardized Financial Statements n Ratio Analysis n The Du Pont Identity n Internal and Sustainable Growth n Using Financial Statement Information
Key Concepts and Skills -Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know the determinants of a firm's profitability and growth Understand the problems and pitfalls in financial statement analysis
2 Key Concepts and Skills n Know how to standardize financial statements for comparison purposes n Know how to compute and interpret important financial ratios n Know the determinants of a firm’s profitability and growth n Understand the problems and pitfalls in financial statement analysis
Standardized Financial Statements Common-Size Balance Sheets Compute all accounts as a percent of total assets Common-Size Income Statements Compute all line items as a percent of sales Standardized statements make it easier to compare financial information,particularly as the company grows They are also useful for comparing companies of different sizes,particularly within the same industry
3 Standardized Financial Statements n Common-Size Balance Sheets q Compute all accounts as a percent of total assets n Common-Size Income Statements q Compute all line items as a percent of sales n Standardized statements make it easier to compare financial information, particularly as the company grows n They are also useful for comparing companies of different sizes, particularly within the same industry
Example:Common-Size Balance Sheet Current Assets Cash $50 2.7% Accounts receivable $310 16.8% Inventory $385 20.9% Total $745 40.4% Fixed assets Net plant and equipment $1100 59.6% Total assets $1845 100% 4
4 Example: Common-Size Balance Sheet Current Assets Cash $50 2.7% Accounts receivable $310 16.8% Inventory $385 20.9% Total $745 40.4% Fixed assets Net plant and equipment $1100 59.6% Total assets $1845 100%
Example:Common-Size Balance Sheet(cont'd) Current liabilities Accounts payable $260 14.1% Notes payable $175 9.5% Total $435 23.6% Long-term debt $225 12.2% Stockholders'equity Common stock and paid-in surplus $290 15.7% Retained earnings $895 48.5% Total $1185 64.2% Total liabilities and equity $1845 100% 5
5 Example: Common-Size Balance Sheet (cont’d) Current liabilities Accounts payable $260 14.1% Notes payable $175 9.5% Total $435 23.6% Long-term debt $225 12.2% Stockholders’ equity Common stock and paid-in surplus $290 15.7% Retained earnings $895 48.5% Total $1185 64.2% Total liabilities and equity $1845 100%
Example:Common-Size Income Statement Net sales $710.00 100.0% Cost of goods sold $480.00 67.6% Depreciation $30.00 4.2% Earnings before interest and $200.00 28.2% taxes(EBIT) Interest $20.00 2.8% Taxable income $180.00 25.4% Taxes $53.45 7.5% Net income $126.55 17.8% 6
6 Example: Common-Size Income Statement Net sales $710.00 100.0 % Cost of goods sold $480.00 67.6% Depreciation $30.00 4.2% Earnings before interest and taxes (EBIT) $200.00 28.2% Interest $20.00 2.8% Taxable income $180.00 25.4% Taxes $53.45 7.5% Net income $126.55 17.8 %
Example:Common-Size Income Statement Last Year This Year Net sales $650.00 100% $710.00 100.0% Cost of goods sold $390.00 60.0% $480.00 67.6% Depreciation $30.00 4.62% $30.00 4.2% EBIT $230.00 35.38% $200.00 28.2% Interest $20.00 3.08% $20.00 2.8% Taxable income $210.00 32.31% $180.00 25.4% Taxes $63.00 9.69% $53.45 7.5% Net income $147.00 22.62% $126.55 17.8% 7
7 Example: Common-Size Income Statement Last Year This Year Net sales $650.00 100% $710.00 100.0 % Cost of goods sold $390.00 60.0% $480.00 67.6% Depreciation $30.00 4.62% $30.00 4.2% EBIT $230.00 35.38% $200.00 28.2% Interest $20.00 3.08% $20.00 2.8% Taxable income $210.00 32.31% $180.00 25.4% Taxes $63.00 9.69% $53.45 7.5% Net income $147.00 22.62% $126.55 17.8 %
Ratio Analysis Ratios also allow for better comparison through time or between companies As we look at each ratio,ask yourself what the ratio is trying to measure and why that information is important Ratios are used both internally and externally 8
8 Ratio Analysis n Ratios also allow for better comparison through time or between companies n As we look at each ratio, ask yourself what the ratio is trying to measure and why that information is important n Ratios are used both internally and externally
Categories of Financial Ratios o Short-term solvency or liquidity ratios Long-term solvency or financial leverage ratios Asset management or turnover ratios Profitability ratios Market value ratios 9
9 Categories of Financial Ratios n Short-term solvency or liquidity ratios n Long-term solvency or financial leverage ratios n Asset management or turnover ratios n Profitability ratios n Market value ratios