Financial ratio and SWOT analysis

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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.

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Welcome to the Military Families Learning Network Webinar

Financial Ra)o and SWOT Analysis

Dr. Michael S. Gu;er, University of Florida

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CEU Informa)on

•  AFC-‐creden)aled par)cipants will earn 1.5 CEUs by par)cipa)ng in this 90-‐minute web conference and following these instruc)ons: 1.  Please make a note of TWO passwords that will be

presented during the presenta)on. 2.  Send BOTH words to the email address given at the end

of the presenta)on, along with your first and last name.

Financial Ra)o and SWOT Analysis

Dr. Michael S. Gu;er, University of Florida

Recap: Why Do You Need Records?

•  Records serve as a reference point •  Records provide evidence of progress

–  Track income, expenses, assets, liabilities, and achievement of objectives

•  Records help consumers work more efficientyly with various financial services providers

Review Case Study Family

•  Meet Bre; (28) and Bri;any Johnson (25). – Live off base – Son – Sam (2) – Dog – Fluffy (10)

•  Bre; is on ac)ve duty, Bri;any is a nurse in local hospital

Our Key Statements

•  Balance Sheet •  Income and Expense Statement •  Budget •  Statement of Changes in Net Worth •  Statement of Cash Flows

2005© University of Wisconsin-Madison

Board of Regents

So to recall: a Personal Balance Sheet

•  Allows you to determine your net worth •  Updating it periodically allows you

to monitor changes in your net worth over time

•  Balance Sheet: Net Worth •  Can NW be negative?

– What does this mean? Is it bad? •  How do we increase net worth?

BREAKING THESE DOWN Suppor)ng statements

Chapter 4: Personal Financial Statements

The Statement of Cash Flows

•  For a given period, the statement of cash flows: – Shows the inflows, oudlows and the net change in cash between two balance sheets

–  Iden)fies the changes in some of the accounts from one balance sheet to the next


Statement of Cash Flows Classifica)ons

•  Cash Flows from Opera)ons •  Cash Flows from Inves)ng Ac)vi)es •  Cash Flows from Financing Ac)vi)es


The Statement of Changes in Net Worth

•  Summarizes noncash flow changes in net worth not recorded on either the income or the cash flow statements.


Statement of Changes in Net Worth Transac)ons

•  Changes in value for assets due to apprecia)on or deprecia)on

•  If an asset other than cash is exchanged for some other assets

•  If assets other than cash are received by gif or inheritance

•  If assets other than cash are given to chari)es or noncharitable donees

Uses for Decomposi)on Statements

•  Ideally – Balance Sheets are accurate based on statements –  Income Por)on of IE is accurate because income is fixed and constant

•  So if our statements do not align, it is likely that the error would be the expenses.

•  Why do so many people fail to accurately account for their expenses?

Using Statements: What-‐Ifs?

•  Budget – Deployment – Post deployment

•  Helps one to envision needs for insurance or other benefits by having a benchmark budget

•  Lets explore one of our submi;ed budgets for deployment for our family?

Deployment: So How Might the Budget Change?

•  Of course, there will be the increase in Bre;'s pay due to the deployment. –  These may include Imminent Danger Pay, Hardship Duty Pay,

Deployed Per Diem and Career Sea Pay. –  He will receive FSA-‐T, Type II (Separa)on Pay) afer 31 days which will

be back dated. –  While in a war zone, he will get his pay tax free and receive a refund

for his Combat SGLI and TSGLI.

•  Perhaps he will re-‐enlist while deployed and get a tax free bonus.

•  Bre; may lose special pays if he doesn't receive a waiver. Examples are Language pays, Diving Duty Pay and Halo Duty Pay.

Thank you Connie


•  Bri;any may have to reduce work hours or leave her employment. –  She may have to pay more for child care. Quality evening and weekend child

care can be very difficult to secure for a decent price. She may have to hire a nanny. She may have to secure a pet si;er.

•  Depending on where the couple is residing, Bri;any may decide to move home with her parents. –  That may reduce housing costs such as u)li)es but, they will have moving fees

(twice) and, perhaps, storage fees. Perhaps they will decide to rent their home while he is deployed. This can boost income but, has expenses of it's own.

•  Food may vary. With Bre; gone, the family grocery bill will be less.

However, ea)ng out may increase because of it's convenience. If she hires a nanny, food costs may stay the same. Entertainment costs may alter.


•  Auto costs may decrease. –  Since they are a two car family, they may put one car on a deployed status for

the insurance. The gas and maintenance will also be lowered. Or Bri;any may provide one of the cars for a nanny. Which may increase insurance premiums, gas and maintenance costs. Perhaps they will sell a car before the deployment with the thought of buying something new when Bre; returns.

•  Added expenses will be care package items and shipping for care packages, ship phone cards/calling cards, and ship/internet purchases by Bre;.

•  An expense they should budget for is the Savings Deposit Program.

•  Pre-‐deployment and/or post-‐deployment trip home to visit Bre;'s family

CEU Password #1

Net Worth

Using Statements

•  Is there sufficient room for savings? – Compare with goals

Savings situa)on

Adequate savings •  Con)nue to treat savings as

a fixed expense •  Explore any opportuni)es

for tax savings •  Monitor progress toward

goal over )me

Inadequate savings •  Reduce expenses

–  If possible •  Increase income

–  If possible •  Adjust tax situa)on

–  Keep more income •  Adjust goal

–  Amount –  Timing –  At all?


Ra)o Analysis

•  The key to ra)o analysis is: – Does the ra)o get to the answer for the ques)on asked?

–  Is there some standard or benchmark to determine whether the result is appropriate for this par)cular client?


Ra)o Analysis—The Objec)ve

•  The objec)ve of ra)o analysis is twofold: – To gain addi)onal insight into the financial situa)on and behavior of the client

– To generate ques)ons for the client to answer to further gain such insight


Types of Ra)o Analysis

•  Liquidity ra)os – emergency fund ra)o and current ra)o

•  Debt ra)os – total debt to net worth, long-‐term debt to net worth, debt to total assets, long-‐term debt to total assets, housing costs to gross income, housing and debt payments to gross income

•  Performance ra)os – savings ra)os and investment performance ra)os


Emergency Fund Ra)o

EFR = Current Assets Monthly Nondiscre)onary Expenses Target of 3 to 6 months

For Our Case Study

EMF = 1600 / (1/12 X (6920+3816+4000+1,920+6540+7080+2820+390+4056+1200+168+600+624) = = 1600 / (40134/12) = 1600 / 3344.5 = 0.478 Less than a month, this is cri)cally low. Lower resiliency for this family to a resource shock


Current Ra)o

CR = Current Assets Current Liabili)es Target of 1.0 to 2.0

For Our Case Study

CR = 1600 / 10275 CR = 0.156 CR = 1600 / 4045 CR = 0.395 Either way it is too low. How do we interpret this?

Debt Ra)o

= Total Liabili)es Total Assets

This should be less than 0.4 or 40%

For Our Case Study

DR 2012=210364/260828 DR 2012=0.80 or 80% DR 2013= 215535/330534 DR 2013= 0.652 or 65% This is also too high, should be 0.4 or less, but it is geung be;er…

Long-‐Term Debt Coverage Ra)o

= Annual gross income Total annual long term debt payments Should exceed 2.5

For Our Case Study

LTDCR = 83,593.36 / (6540+7080+2820+4056) 83,593.36/20496 = 4.08 With CC debt it is 83593.36/(20496+6230) = 3.13 In either care, the debt coverage is reasonable.

Debt-‐to-‐Income Ra)o

= Annual consumer credit payment Annual afer-‐tax income

Should be less than 15%

For Our Case Study

•  So here we will count car loans, credit cards. Now I include student loans too so we capture debt burden but Not the mortgage.

DIR = (6230+2820+4056)/(83593.36-‐23839.31) DIR = 13106/72860.05 = 17.99% Debt is not overwhelming but becoming burdensome

Credit Usage Ra)o

= Total Credit Used Total Credit Available

Should be less than 30% (Consistent with FICO measure)

For Our Case Study

So since you now know our family has a credit limit of $15,000 on their credit, what is their usage? CUR 2012= 7980/15000 = 0.532 or 53.2% CUR 2013= 6230/15000 = 0.415 or 41.5% So it is improving but s)ll rela)ve to FICO benchmark of 30%


Lending Ra)os – Front End

•  Housing Costs (Mortgage payment + Property tax + Homeowners insurance) to Gross Income – Target of ≤ 28%

For Our Case Study

FER = (6540+7080+4692)/83593.36 FER = 18312/83593.36 = 21.9%

Lending Ra)o – Back-‐End

•  Housing and Debt Payments (i.e. credit card, auto loan) to Gross Income – Target of ≤ 36%

For Our Case Study

BER = (6540+7080+4692+4056+6230)/83593.36 BER = 28598/83593.36 = 34.2% So housing wise our family is not in too bad of shape, other debt yes…


Savings Ra)os

•  Rate of Savings = Annual Savings Annual Gross Income Target of ≥ 10% (age dependent)

•  Includes Personal and Employer Contribu)ons

For Our Case Study

SR = (2731+1488+2000)/83593.36 SR = 6219/83593.36 SR = 0.074 or 7.4% Is this okay?


Investment Ra)os

•  Income on Investments = Income from Investments Average Invested Assets •  ROI = EI – BI – Addi)onal Investments Average Invested Assets Target of 9 to 12% •  Investment Assets to Gross Income

For Our Case Study

ROI = (33871+1727)/[(24598+4591+2000+61200+8699+2000)/2] ROI = 35598 / 51544 = 69% WOW what a return…

So let’s summarize

•  Liquidity – Family has insufficient capital to meet current obliga)ons

– Family is not adequately prepared for an emergency without addi)onal support or resources from others

•  Debt – This family has a high debt load

•  It presents issues for level of debt and amount of debt payments

So let’s summarize

•  Housing – Housing is not too burdensome for this family

•  Savings/Inves)ng –  Investments did great, but they probably need to be saving more


Ver)cal & Growth Analysis

•  Ver)cal analysis: – Balance sheet – each item presented as a percent of total assets

–  Income statement – each item presented as a percent of total income

•  Growth analysis: – Calculates the growth rate of certain financial variables over )me using TVM tools

For Our Case Study

•  We have seen –  Income not dras)cally change – Expenses change – Loss of value on the home –  Increase of value on investments – Deprecia)on on tangible assets

CEU Password #2

Ra)o

SO BASED ON FINANCIAL POSITION…

What would we tell a family interested in some of the following issues?

So let’s explore various strategies

•  Refinance a mortgage with FRM •  Obtain an ARM •  Use HELOC to consolidate debts •  Use HELOC for emergency fund

So let’s explore various strategies

•  Payoff unsecured debt with assets earning lower rates of return

•  Reduce expenses


Limita)ons of Financial Statement Analysis

•  Infla)on •  Use of es)mates •  Few benchmarks for individuals


Sensi)vity Analysis & Risk Analysis

•  Sensi)vity analysis allows manipula)on of input variables by small increments to determine the impact on the ra)o

•  Risk analysis examines the uncertainty of cash flows to the individual – Business or investment risk – Financial risk

Iden)fying SWOT

•  Strengths •  Weaknesses •  Opportuni)es •  Threats

Iden)fying SWOT

•  Think in terms of the ques)ons we asked earlier in our analysis – Cash flow constraints – Liquidity – Savings – Debt burden

•  Cash flows •  Net worth •  Credit worthiness

– Housing burden

Strengths

•  Produc)ve investments •  Commitment to saving

Weaknesses

•  Carrying consumer debt •  Li;le Discre)onary Cash Flow to address debt issue

•  Earnings growth is minimal

Opportuni)es

•  Invest more •  Trim expenses to improve DCF •  Stable income currently

Threats

•  Heavy debt load •  Lack of liquidity creates vulnerability to income and resource shocks

CEU Informa)on

•  Send an email to: [email protected] •  Include:

– Both CEU Passwords given in this presenta)on – Your first and last name

•  Emails must be received by: Wednesday, April 17, 2013 at 5 p.m. ET

Financial ratio and SWOT analysis

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Transcript of Financial ratio and SWOT analysis