Description
Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability and profitability of a business, sub-business or project.
FINANCIAL STATEMENT ANALYSIS
STUDY OBJECTIVES
INTRODUCTION TO FINANCIAL ANALYSIS
IUC, S.Drenska
Comparative analysis T l used Tools d in i financial fi i l statement t t t analysis l i Horizontal analysis Vertical analysis Liquidity, profitability, efficiency, solvency ratios Investment ratios
Financial Accounting, 5e
Weygandt, Kieso, & Kimmel
Limitations of financial statement analysis
1
2
STUDY OBJECTIVE 1
COMPARATIVE ANALYSIS
STUDY OBJECTIVE 2 ANALYSIS TOOLS
HORIZONTAL (TREND) ANALYSIS evaluates a series of financial statement data over a period of time. VERTICAL ANALYSIS expresses each item in a financial statement as a percent of a base amount RATIO ANALYSIS expresses the relationship among selected items of financial statement data.
3 4
STUDY OBJECTIVE 3 HORIZONTAL ANALYSIS
HORIZONTAL ANALYSIS OF BALANCE SHEET
Changes are measured against a base year with the following formula.
Change since base period
Current year amount — Base year amount ——————————————————————— Base year amount
5
6
Page 1
HORIZONTAL ANALYSIS OF INCOME STATEMENT
STUDY OBJECTIVE 4 VERTICAL ANALYSIS
Financial statement elements are measured as a percent of the total.
Balance Sheet
Income Statement Elements are a percent of total sales
Elements are a percent of total assets
7
8
VERTICAL ANALYSIS OF BALANCE SHEET
QUALITY DEPARTMENT STORE INC. Condensed Balance Sheets December 31 2003 Amount Percent Assets Current assets Plant assets (net) Intangible assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity $1 1,020,000 020 000 800,000 15,000 $ 1,835,000 $ 344,500 487,500 832,000 275,400 727,600 1,003,000 $ 1,835,000 55.6% 55 6% $ 945,000 945 000 43.6% 632,500 0.8% 17,500 100.0% $ 1,595,000 18.8% $ 303,000 26.5% 497,000 45.3% 800,000 15.0% 39.7% 54.7% 100.0% 270,000 525,000 795,000 $1,595,000 59.2% 59 2% 39.7% 1.1% 100.0% 19.0% 31.2% 50.2% 16.9% 32.9% 49.8% 100.0% 9 2002 Amount Percent
VERTICAL ANALYSIS
OF INCOME STATEMENT
QUALITY DEPARTMENT STORE INC. Condensed Income Statements For the Years Ended December 31
2003 2002 Amount Percent Amount Percent $ 2,195,000 104.7% $ 1,960,000 106.7% , 4.7% 123,000 , 6.7% 98,000 2,097,000 100.0% 1,837,000 100.0% 61.1% 1,140,000 62.1% 1,281,000 816,000 38.9% 697,000 37.9% 253,000 12.0% 211,500 11.5% 5.0% 108,500 5.9% 104,000 357,000 17.0% 320,000 17.4% 459,000 21.9% 377,000 20.5% 9,000 36,000 432,000 168,200 $ 263,800 0.4% 11,000 0.6% 2.2% 18.9% 7.5% 11.4% 10
Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income from operations Other revenues and gains Interest and dividends Other expenses and losses Interest expense Income before income taxes Income tax expense Net income
1.7% 40,500 20.6% 347,500 8.0% 139,000 12.6% $ 208,500
INTERCOMPANY COMPARISION OF INCOME STATEMENT
REVIEW QUESTION
Sammy Corporation reported net sales of $300,000 and $330,000 for 2004 and 2005. Calculate the percentage increase.
330,000 - 300,000 300,000
10%
=
Another way to express this change: 2005 sales are 110% of 2004 sales
11 12
Page 2
STUDY OBJECTIVE 5 RATIO ANALYSIS
STUDY OBJECTIVE 5 Financial ratios
Liquidity
Ratio analysis expresses the relationship among selected items of financial statement data. R ti are used Ratios d for f : 1 Intracompany comparisons 2 Industry average comparisons 3 Intercompany comparisons
Profitability Efficiency Financial gearing/ solvency Investment
13
14
Liquidity ratios
Current liquidity Acid test/ Quick ratio Cash from operating activities to maturing obligations
CURRENT RATIO
A LIQUIDITY RATIO
Evaluates liquidity and short-term debt-paying ability.
CURRENT ASSETS CURRENT RATIO = ——————————— CURRENT LIABILITIES
Quality Department Store
2003 $1,020,000 ————— $344,500 = 2.96:1 2002 $945,000 ———— $303,000 = 3.12:1
Industry average ———————— 1.28:1
15
Sears, Roebuck and Co. ———————————— 1.32:1
16
ACID-TEST/QUICK RATIO
A LIQUIDITY RATIO
ACID-TEST/QUICK RATIO
Quality Department Store
CASH + MARKETABLE SECURITIES + RECEIVABLES (NET) ACID-TEST RATIO = ———————————————————————————— CURRENT LIABILITIES
2003
2002
Q u a lity D e p a r tm e n t S to r e B a la n c e S h e e t (p a r tia l) 2002 C u rren t a ssets C ash M a r k e ta b le s e c u r itie s R e c e iv a b le s (n e t) In v en to ry P r e p a id e x p e n s e s T o ta l c u r r e n t a sse ts $ 10 2 23 62 5 $ 1 ,0 2 0 0 0 0 0 0 ,0 ,0 ,0 ,0 ,0 ,0 0 0 0 0 0 0 0 0 0 0 0 0 2001 $ 15 7 18 50 4 $ 94 5 0 0 0 0 5 ,0 ,0 ,0 ,0 ,0 ,0 0 0 0 0 0 0 0 0 0 0 0 0
17
$100,000 + $20,000 + $230,000 $155,000 + $70,000 + $180,000 —————————————— = 1.02:1 —————————————— = 1.3:1 $344,500 $303,000
Industry average ———————— 0.33:1
Sears, Roebuck and Co. ———————————— 0.85:1
18
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CASH FROM OPERATING ACTIVITIES TO MATURING OBLIGATIONS
Current Cash Debt Coverage Ratio Net Cash Provided by Operating Activities = ———————————————————— Average Current Liabilities
PROFITABILITY RATIOS
Measure the ability of the business to achieve profit targets.
Quality Department Store
2003 1999
$404,000 —————————————— =1.25:1 ($303,000 + $344,500)/2
ROS - Operating O ti profit fit margin i Gross profit margin ROSF – Return on shareholders funds ROCE – Return on capital employed
2002 1998
$$340,000 —————————————— = 1.15:1 ($290,000 + $303,000)/2
Industry average ———————— 1.1:1
Sears, Roebuck and Co. ———————————— .264:1
19 20
PROFIT MARGIN
A PROFITABILITY RATIO
OPERATING PROFIT MARGIN
• Measures the percentage of each dollar of sales that results in gross or operating profit. • Measures how profitable the company is
Quality Department Store
2003 $459,000
————— = 21.89%
2002 $377,000
————— = 20.5%
$2,097,000
OPERATING PROFIT OPERATING PROFIT MARGIN = —————— x 100 Net SALES REVENUE
$1,837,000
GROSS PROFIT GROSS PROFIT MARGIN = —————— x 100 Net SALES REVENUE
21
22
RETURN ON SHAREHOLDERS FUNDS - ROSF
NET PROFIT – PREFERRED DIVIDENDS ROSF =
——————————— ——————————————————————
RETURN ON SHAREHOLDER FUNDS Quality Department Store /no preferred dividends
2003
———————————
Average Ordinary share capital +Reserves
2002
———————————
$263 800 $263,800
$208 500 $208,500
OPERATING PROFIT ROCE =
——————————— ——————————— ———————————
[
———————————
= 29.3% $795,000 + $1,003,000 2
]
[
———————————
= 28.5% $667,000 + $795,000 2
]
Average Ordinary share capital +Reserves +Non-current liabilities
Industry average ———————— 20.5%
23
Sears, Roebuck and Co. ———————————— 51.65%
24
Page 4
EFFICIENCY/ ACTIVITY RATIOS
Measure the capacity utilisation for the period – the ability of the company to explore assets in a profitable way.
A Average i inventory t t turnover period i d Average trade receivables turnover period Average trade payables turnovcr period Asset turnover ratio
RECEIVABLES TURNOVER
• In days measures the number of days after the credit sale, receivables are collected. • In times measures the number of times receivables are collected during the period
CREDIT SALES RECEIVABLES TURNOVER = ——————————————— in times AVERAGE RECEIVABLES AVERAGE RECEIVABLES RECEIVABLES TURNOVER = ———————————— x 365 in days CREDIT SALES
25 26
RECEIVABLES TURNOVER
Quality Department Store
2003 $2,097,000 —————————— = 10.2 times $180,000 + $230,000 —————————— 2 2002 $1,837,000 —————————— = 9.7 times $200,000 + $180,000 —————————— 2
INVENTORY TURNOVER
• In times - measures the number of times, on average, the inventory is sold during the period . • In days – measures the number of days before the inventory is totally renewed
[
]
[
]
COST OF GOODS SOLD /COGS/ INVENTORY TURNOVER = ———————————— in times AVERAGE INVENTORY Average inventory INVENTORY TURNOVER = ———————————— x 365 in days COGS
Industry average ———————— 10.8 times
Sears, Roebuck and Co. ———————————— 2.4 times
27
28
INVENTORY TURNOVER
Quality Department Store
2003 $1,281,000
—————————— = 2.3 times
ASSET TURNOVER
A PROFITABILITY RATIO
2002 $1,140,000
—————————— = 2.4 times ——————————
Measures how efficiently a company uses its assets to generate sales. sales
[
$500,000 + $620,000 2
——————————
]
[
$450,000 + $500,000 2
]
Net sales ASSET TURNOVER = ————————— LT Capital employed
29 30
Industry average ———————— 6.7 times
Sears, Roebuck and Co. ———————————— 5.0 times
Page 5
ASSET TURNOVER
Quality Department Store
INVESTMENT RATIOS
Measure the shares performance.
Earnings per share
2003 $2,097,000 ——————————— =2.09 times $1,003,000
2002
Price/Earnings g ratio
$1837000 ——————————— = 1.42 times 1,292,000
Dividend payout ratio Dividend yeld
31
32
EARNINGS PER SHARE
EPS measures net income earned on each share q y of shareholders equity.
EARNINGS PER SHARE
Quality Department Store
2003 $263,000 ————————— = $.97 270,000 + 275,400 ————————— 2 2002 $208,500 ————— = $.77 270,000
EARNINGS Earnings available to ordinary shareholders PER SHARE = ———————————————————————————— Number of ordinary shares issued
[
33
]
34
PRICE TO EARNINGS
PRICE TO EARNINGS
Quality Department Store
Measures the ratio of the market price of each share of shareholders equity to the earnings per share. share
2003 003 $12.00 ——— = $ .97 12.4 times
2002 00 $ 8.00 ——— = $ .77 10.4 times
MARKET PRICE PER SHARE PRICE-EARNINGS RATIO = ————————————————————————— EARNINGS PER SHARE
Industry average
————————
Sears, Roebuck and Co.
———————————
26 times
3.8 times
35
36
Page 6
PAYOUT RATIO
PAYOUT RATIO
A PROFITABILITY RATIO
Quality Department Store
Measures the percentage of earnings distributed in the form of cash dividends dividends.
2003
$61,200 ————— $263,800 = 23.2%
2002
$60,000 ————— $208,500 = 28.8%
CASH DIVIDENDS PAYOUT RATIO = ————————————————————————— Earnings available
Industry average
————————
Sears, Roebuck and Co.
———————————
16.0%
37
9.6%
38
DIVIDEND YELD
GEARING/ SOLVENCY RATIOS
Measure the long-term financial risk.
Times interest cover ratio Financial g gearing g
Measures the percentage of market value per share distributed in the form of dividends after tax tax.
DIVIDENDS /(1-t) DIVIDEND YELD = ————————————————————————— x 100 Market value per share
39
40
TIMES INTEREST EARNED
A SOLVENCY RATIO
Measures ability to meet interest payments as they come due.
Income before Income Taxes and Interest Expense Interest Expense
FINANCIAL GEARING
Measures % of Long term capital employed provided by long-term creditors Total long term liabilities Share capital +Reserves +LT Liabilities
Quality Department Store
2003 $468,000 ———— = 13 times $36,000
Industry average ———————— 11.98 times
Quality Department Store
2002 $388,000 ———— = 9.6 times $40,500
Sears, Roebuck and Co. ———————————— 6.3 times
41
2003
2002
$487,500 = $1,490,500 32.70%
$497,000 $1,789,000
=
27.8%
42
Page 7
REVIEW QUESTION
Ace Ventura Pet Detective, Inc. reported the following:
Cash Marketable Securities Accounts Receivable I t Inventory Prepaid Insurance Prepaid Rent Total Assets Current Liabilities Calculate the Quick Ratio. $125,000 $342,500 $780,000 $56 000 $56,000 $3,600 $4,900 $1,729,000 $562,000
STUDY OBJECTIVE 6 EARNINGS POWER & IRREGULAR ITEMS
Earnings power is the NORMAL LEVEL OF SALES REVENUE to be obtained in the future. Earnings power is affected by irregular items. Three types of “Irregular” items: 1) Discontinued operations 2) Extraordinary items 3) Changes in accounting principle
2.22 = (125000+342500+780000) / 562000
43 44
DISCONTINUED OPERATIONS
• The disposal of a significant segment of a business. – The income or (loss) from discontinued operations consists of two parts: • The income or (loss) from operations and • The gain/loss on the disposal of the segment • The results are shown “net of tax”
DISCONTINUED OPERATIONS STATEMENT PRESENTATION
For the year ended December 31, 2006
45
46
EXTRAORDINARY ITEMS
• Extraordinary items are events and transactions that meet two conditions. – unusual in nature and – infrequent in occurrence – the th results lt are shown h “net “ t of f tax” t ”
ORDINARY VS. EXTRAORDINARY
47
48
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CHANGE IN ACCOUNTING PRINCIPLE
STUDY OBJECTIVE 7
LIMITATIONS OF F/S ANALYSIS
Estimates Depreciation, allowances, contingencies Historical data not adjusted for inflation/deflation FIFO, LIFO, Average Cost. Completed contract, percentage of completion
• Occurs when the principle used in the current year is different form the one used last year. When this happens: – The new principle is used to report the results of operations for current year – The cumulative effect of the change on all prior year income statements should be disclosed “net of tax”
Cost Alternative methods Atypical data
Seasonal accounting data may not be representative Firm Conglomerates hard to identify with single diversification industry.
49 50
Time for exercises…
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doc_982890550.pdf
Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability and profitability of a business, sub-business or project.
FINANCIAL STATEMENT ANALYSIS
STUDY OBJECTIVES
INTRODUCTION TO FINANCIAL ANALYSIS
IUC, S.Drenska
Comparative analysis T l used Tools d in i financial fi i l statement t t t analysis l i Horizontal analysis Vertical analysis Liquidity, profitability, efficiency, solvency ratios Investment ratios
Financial Accounting, 5e
Weygandt, Kieso, & Kimmel
Limitations of financial statement analysis
1
2
STUDY OBJECTIVE 1
COMPARATIVE ANALYSIS
STUDY OBJECTIVE 2 ANALYSIS TOOLS
HORIZONTAL (TREND) ANALYSIS evaluates a series of financial statement data over a period of time. VERTICAL ANALYSIS expresses each item in a financial statement as a percent of a base amount RATIO ANALYSIS expresses the relationship among selected items of financial statement data.
3 4
STUDY OBJECTIVE 3 HORIZONTAL ANALYSIS
HORIZONTAL ANALYSIS OF BALANCE SHEET
Changes are measured against a base year with the following formula.
Change since base period
Current year amount — Base year amount ——————————————————————— Base year amount
5
6
Page 1
HORIZONTAL ANALYSIS OF INCOME STATEMENT
STUDY OBJECTIVE 4 VERTICAL ANALYSIS
Financial statement elements are measured as a percent of the total.
Balance Sheet
Income Statement Elements are a percent of total sales
Elements are a percent of total assets
7
8
VERTICAL ANALYSIS OF BALANCE SHEET
QUALITY DEPARTMENT STORE INC. Condensed Balance Sheets December 31 2003 Amount Percent Assets Current assets Plant assets (net) Intangible assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity $1 1,020,000 020 000 800,000 15,000 $ 1,835,000 $ 344,500 487,500 832,000 275,400 727,600 1,003,000 $ 1,835,000 55.6% 55 6% $ 945,000 945 000 43.6% 632,500 0.8% 17,500 100.0% $ 1,595,000 18.8% $ 303,000 26.5% 497,000 45.3% 800,000 15.0% 39.7% 54.7% 100.0% 270,000 525,000 795,000 $1,595,000 59.2% 59 2% 39.7% 1.1% 100.0% 19.0% 31.2% 50.2% 16.9% 32.9% 49.8% 100.0% 9 2002 Amount Percent
VERTICAL ANALYSIS
OF INCOME STATEMENT
QUALITY DEPARTMENT STORE INC. Condensed Income Statements For the Years Ended December 31
2003 2002 Amount Percent Amount Percent $ 2,195,000 104.7% $ 1,960,000 106.7% , 4.7% 123,000 , 6.7% 98,000 2,097,000 100.0% 1,837,000 100.0% 61.1% 1,140,000 62.1% 1,281,000 816,000 38.9% 697,000 37.9% 253,000 12.0% 211,500 11.5% 5.0% 108,500 5.9% 104,000 357,000 17.0% 320,000 17.4% 459,000 21.9% 377,000 20.5% 9,000 36,000 432,000 168,200 $ 263,800 0.4% 11,000 0.6% 2.2% 18.9% 7.5% 11.4% 10
Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income from operations Other revenues and gains Interest and dividends Other expenses and losses Interest expense Income before income taxes Income tax expense Net income
1.7% 40,500 20.6% 347,500 8.0% 139,000 12.6% $ 208,500
INTERCOMPANY COMPARISION OF INCOME STATEMENT
REVIEW QUESTION
Sammy Corporation reported net sales of $300,000 and $330,000 for 2004 and 2005. Calculate the percentage increase.
330,000 - 300,000 300,000
10%
=
Another way to express this change: 2005 sales are 110% of 2004 sales
11 12
Page 2
STUDY OBJECTIVE 5 RATIO ANALYSIS
STUDY OBJECTIVE 5 Financial ratios
Liquidity
Ratio analysis expresses the relationship among selected items of financial statement data. R ti are used Ratios d for f : 1 Intracompany comparisons 2 Industry average comparisons 3 Intercompany comparisons
Profitability Efficiency Financial gearing/ solvency Investment
13
14
Liquidity ratios
Current liquidity Acid test/ Quick ratio Cash from operating activities to maturing obligations
CURRENT RATIO
A LIQUIDITY RATIO
Evaluates liquidity and short-term debt-paying ability.
CURRENT ASSETS CURRENT RATIO = ——————————— CURRENT LIABILITIES
Quality Department Store
2003 $1,020,000 ————— $344,500 = 2.96:1 2002 $945,000 ———— $303,000 = 3.12:1
Industry average ———————— 1.28:1
15
Sears, Roebuck and Co. ———————————— 1.32:1
16
ACID-TEST/QUICK RATIO
A LIQUIDITY RATIO
ACID-TEST/QUICK RATIO
Quality Department Store
CASH + MARKETABLE SECURITIES + RECEIVABLES (NET) ACID-TEST RATIO = ———————————————————————————— CURRENT LIABILITIES
2003
2002
Q u a lity D e p a r tm e n t S to r e B a la n c e S h e e t (p a r tia l) 2002 C u rren t a ssets C ash M a r k e ta b le s e c u r itie s R e c e iv a b le s (n e t) In v en to ry P r e p a id e x p e n s e s T o ta l c u r r e n t a sse ts $ 10 2 23 62 5 $ 1 ,0 2 0 0 0 0 0 0 ,0 ,0 ,0 ,0 ,0 ,0 0 0 0 0 0 0 0 0 0 0 0 0 2001 $ 15 7 18 50 4 $ 94 5 0 0 0 0 5 ,0 ,0 ,0 ,0 ,0 ,0 0 0 0 0 0 0 0 0 0 0 0 0
17
$100,000 + $20,000 + $230,000 $155,000 + $70,000 + $180,000 —————————————— = 1.02:1 —————————————— = 1.3:1 $344,500 $303,000
Industry average ———————— 0.33:1
Sears, Roebuck and Co. ———————————— 0.85:1
18
Page 3
CASH FROM OPERATING ACTIVITIES TO MATURING OBLIGATIONS
Current Cash Debt Coverage Ratio Net Cash Provided by Operating Activities = ———————————————————— Average Current Liabilities
PROFITABILITY RATIOS
Measure the ability of the business to achieve profit targets.
Quality Department Store
2003 1999
$404,000 —————————————— =1.25:1 ($303,000 + $344,500)/2
ROS - Operating O ti profit fit margin i Gross profit margin ROSF – Return on shareholders funds ROCE – Return on capital employed
2002 1998
$$340,000 —————————————— = 1.15:1 ($290,000 + $303,000)/2
Industry average ———————— 1.1:1
Sears, Roebuck and Co. ———————————— .264:1
19 20
PROFIT MARGIN
A PROFITABILITY RATIO
OPERATING PROFIT MARGIN
• Measures the percentage of each dollar of sales that results in gross or operating profit. • Measures how profitable the company is
Quality Department Store
2003 $459,000
————— = 21.89%
2002 $377,000
————— = 20.5%
$2,097,000
OPERATING PROFIT OPERATING PROFIT MARGIN = —————— x 100 Net SALES REVENUE
$1,837,000
GROSS PROFIT GROSS PROFIT MARGIN = —————— x 100 Net SALES REVENUE
21
22
RETURN ON SHAREHOLDERS FUNDS - ROSF
NET PROFIT – PREFERRED DIVIDENDS ROSF =
——————————— ——————————————————————
RETURN ON SHAREHOLDER FUNDS Quality Department Store /no preferred dividends
2003
———————————
Average Ordinary share capital +Reserves
2002
———————————
$263 800 $263,800
$208 500 $208,500
OPERATING PROFIT ROCE =
——————————— ——————————— ———————————
[
———————————
= 29.3% $795,000 + $1,003,000 2
]
[
———————————
= 28.5% $667,000 + $795,000 2
]
Average Ordinary share capital +Reserves +Non-current liabilities
Industry average ———————— 20.5%
23
Sears, Roebuck and Co. ———————————— 51.65%
24
Page 4
EFFICIENCY/ ACTIVITY RATIOS
Measure the capacity utilisation for the period – the ability of the company to explore assets in a profitable way.
A Average i inventory t t turnover period i d Average trade receivables turnover period Average trade payables turnovcr period Asset turnover ratio
RECEIVABLES TURNOVER
• In days measures the number of days after the credit sale, receivables are collected. • In times measures the number of times receivables are collected during the period
CREDIT SALES RECEIVABLES TURNOVER = ——————————————— in times AVERAGE RECEIVABLES AVERAGE RECEIVABLES RECEIVABLES TURNOVER = ———————————— x 365 in days CREDIT SALES
25 26
RECEIVABLES TURNOVER
Quality Department Store
2003 $2,097,000 —————————— = 10.2 times $180,000 + $230,000 —————————— 2 2002 $1,837,000 —————————— = 9.7 times $200,000 + $180,000 —————————— 2
INVENTORY TURNOVER
• In times - measures the number of times, on average, the inventory is sold during the period . • In days – measures the number of days before the inventory is totally renewed
[
]
[
]
COST OF GOODS SOLD /COGS/ INVENTORY TURNOVER = ———————————— in times AVERAGE INVENTORY Average inventory INVENTORY TURNOVER = ———————————— x 365 in days COGS
Industry average ———————— 10.8 times
Sears, Roebuck and Co. ———————————— 2.4 times
27
28
INVENTORY TURNOVER
Quality Department Store
2003 $1,281,000
—————————— = 2.3 times
ASSET TURNOVER
A PROFITABILITY RATIO
2002 $1,140,000
—————————— = 2.4 times ——————————
Measures how efficiently a company uses its assets to generate sales. sales
[
$500,000 + $620,000 2
——————————
]
[
$450,000 + $500,000 2
]
Net sales ASSET TURNOVER = ————————— LT Capital employed
29 30
Industry average ———————— 6.7 times
Sears, Roebuck and Co. ———————————— 5.0 times
Page 5
ASSET TURNOVER
Quality Department Store
INVESTMENT RATIOS
Measure the shares performance.
Earnings per share
2003 $2,097,000 ——————————— =2.09 times $1,003,000
2002
Price/Earnings g ratio
$1837000 ——————————— = 1.42 times 1,292,000
Dividend payout ratio Dividend yeld
31
32
EARNINGS PER SHARE
EPS measures net income earned on each share q y of shareholders equity.
EARNINGS PER SHARE
Quality Department Store
2003 $263,000 ————————— = $.97 270,000 + 275,400 ————————— 2 2002 $208,500 ————— = $.77 270,000
EARNINGS Earnings available to ordinary shareholders PER SHARE = ———————————————————————————— Number of ordinary shares issued
[
33
]
34
PRICE TO EARNINGS
PRICE TO EARNINGS
Quality Department Store
Measures the ratio of the market price of each share of shareholders equity to the earnings per share. share
2003 003 $12.00 ——— = $ .97 12.4 times
2002 00 $ 8.00 ——— = $ .77 10.4 times
MARKET PRICE PER SHARE PRICE-EARNINGS RATIO = ————————————————————————— EARNINGS PER SHARE
Industry average
————————
Sears, Roebuck and Co.
———————————
26 times
3.8 times
35
36
Page 6
PAYOUT RATIO
PAYOUT RATIO
A PROFITABILITY RATIO
Quality Department Store
Measures the percentage of earnings distributed in the form of cash dividends dividends.
2003
$61,200 ————— $263,800 = 23.2%
2002
$60,000 ————— $208,500 = 28.8%
CASH DIVIDENDS PAYOUT RATIO = ————————————————————————— Earnings available
Industry average
————————
Sears, Roebuck and Co.
———————————
16.0%
37
9.6%
38
DIVIDEND YELD
GEARING/ SOLVENCY RATIOS
Measure the long-term financial risk.
Times interest cover ratio Financial g gearing g
Measures the percentage of market value per share distributed in the form of dividends after tax tax.
DIVIDENDS /(1-t) DIVIDEND YELD = ————————————————————————— x 100 Market value per share
39
40
TIMES INTEREST EARNED
A SOLVENCY RATIO
Measures ability to meet interest payments as they come due.
Income before Income Taxes and Interest Expense Interest Expense
FINANCIAL GEARING
Measures % of Long term capital employed provided by long-term creditors Total long term liabilities Share capital +Reserves +LT Liabilities
Quality Department Store
2003 $468,000 ———— = 13 times $36,000
Industry average ———————— 11.98 times
Quality Department Store
2002 $388,000 ———— = 9.6 times $40,500
Sears, Roebuck and Co. ———————————— 6.3 times
41
2003
2002
$487,500 = $1,490,500 32.70%
$497,000 $1,789,000
=
27.8%
42
Page 7
REVIEW QUESTION
Ace Ventura Pet Detective, Inc. reported the following:
Cash Marketable Securities Accounts Receivable I t Inventory Prepaid Insurance Prepaid Rent Total Assets Current Liabilities Calculate the Quick Ratio. $125,000 $342,500 $780,000 $56 000 $56,000 $3,600 $4,900 $1,729,000 $562,000
STUDY OBJECTIVE 6 EARNINGS POWER & IRREGULAR ITEMS
Earnings power is the NORMAL LEVEL OF SALES REVENUE to be obtained in the future. Earnings power is affected by irregular items. Three types of “Irregular” items: 1) Discontinued operations 2) Extraordinary items 3) Changes in accounting principle
2.22 = (125000+342500+780000) / 562000
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DISCONTINUED OPERATIONS
• The disposal of a significant segment of a business. – The income or (loss) from discontinued operations consists of two parts: • The income or (loss) from operations and • The gain/loss on the disposal of the segment • The results are shown “net of tax”
DISCONTINUED OPERATIONS STATEMENT PRESENTATION
For the year ended December 31, 2006
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EXTRAORDINARY ITEMS
• Extraordinary items are events and transactions that meet two conditions. – unusual in nature and – infrequent in occurrence – the th results lt are shown h “net “ t of f tax” t ”
ORDINARY VS. EXTRAORDINARY
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CHANGE IN ACCOUNTING PRINCIPLE
STUDY OBJECTIVE 7
LIMITATIONS OF F/S ANALYSIS
Estimates Depreciation, allowances, contingencies Historical data not adjusted for inflation/deflation FIFO, LIFO, Average Cost. Completed contract, percentage of completion
• Occurs when the principle used in the current year is different form the one used last year. When this happens: – The new principle is used to report the results of operations for current year – The cumulative effect of the change on all prior year income statements should be disclosed “net of tax”
Cost Alternative methods Atypical data
Seasonal accounting data may not be representative Firm Conglomerates hard to identify with single diversification industry.
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Time for exercises…
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