Sample Fin Analysis

8/6/2019 Sample Fin Analysis

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Trend Percentages ExampleWheeler, Inc. provides you with the following

operating data and asks that you prepare atrend analysis.

Wheeler, Inc.Operating Data

1999 1998 1997 1996 1995Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$

Expenses 2,033 1,966 1,870 1,803 1,701 Net income 372$ 278$ 242$ 188$ 119$

$1,991$1,991 -- $1,820 = $171$1,820 = $171


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Trend Percentages ExampleUsing 1995 as the base year, we develop the

following percentage relationships.

Wheeler, Inc.Operating Data1999 1998 1997 1996 1995

Revenues 132% 123% 116% 109% 100%Expenses 120% 116% 110% 106% 100%Net income 313% 234% 203% 158% 100%

$1,991$1,991 -- $1,820 = $171$1,820 = $171$171$171 $1,820 = 9% rounded$1,820 = 9% rounded


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CHA PTER 17CHA PTER 17ANALYSIS AND

INTERPRETATION O FF INANCIAL STATEMENTS


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CLOVER CORPORATIONComparative Balance SheetsDecember 31, 1999 and 1998

Increa se (Decrease)1999 1998 Amount %

Liabilities and Stockholders' EquityCurrent liabilities:

Accounts payable 67,000$ 44,000$ 23,000$ 52.3Notes payable 3,000 6,000 (3,000) (50.0)

Total current liabilities 70,000 50,000 20,000 40.0Long-term liabilities:

Bonds payable, 8% 75,000 80,000 (5,000) (6.3)Total liabilities 145,000 130,000 15,000 11.5

Stockholders' equity:Preferred stock 20,000 20,000 - 0.0

Common stock 60,000 60,000 - 0.0Additional paid-in capital 10,000 10,000 - 0.0

Total paid-in capital 90,000 90,000 - 0.0Retained earnings 80,000 69,700 10,300 14.8

Total stockholders' equity 170,000 159,700 10,300 6.4Total liabilities and stockholders' equity 315,000$ 289,700$ 25,300$ 8.7


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Now, lets apply theproce d res to theincome statement.

H orizontal A nalysis Example


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CLOVER CORPORA T ONComparative Income Statem ents

For the Years Ended December 31, 1999 and 1998Increase (Decrease)

1999 1998 Amount %Net sales 520,000$ 480,000$ 40,000$ 8.3

Cost of goods sold 360,000 315,000 45,000 14.3Gross margin 160,000 165,000 (5,000) (3.0)Operating expenses 128,600 126,000 2,600 2.1Net operating income 31,400 39,000 (7,600) (19.5)Interest expense 6,400 7,000 (600) (8.6)Net income before taxes 25,000 32,000 (7,000) (21.9)Less income taxes (30%) 7,500 9,600 (2,100) (21.9)Net income 17,500$ 22,400$ (4,900)$ (21.9)


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CLOVER CORPORA TIONComparative Income Statem ents


1999 1998 Amount %Net sales 520,000$ 480,000$ 40,000$ 8.3


Sales increased b y 8.3% while net

income decreased b y 21.9%.


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CLOVER CORPORA TIONComparative Income Statem ents


1999 1998 Amount %Net sales 520,000$ 480,000$ 40,000$ 8.3


There w ere increases in both cost of goodssold (14.3%) and operating expenses (2.1%).These increased costs more than offset the

increase in sales, yielding an overalldecrease in net income.


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Vertical A nalysis ExampleThe management of Sample C ompany asks

you to prepare a vertical analysisvertical analysis for thecomparative balance sheets of the company.


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Samp l mpanyBa lance Shee t ( e t )

t ecember , and f ta l e t

ash 82 , , 8%Acc ts . ec . 20 ,000 00 ,000 25% 26%Inven t ry 87 ,000 82 ,000 8% 21%

Land 101 ,000 0,000 21% 23%Equ ipmen t 110 ,000 100 ,000 23% 26%Accum . epr . (17 ,000 ) (15 ,000 ) - % - %

ta l 83 ,000$ 387 ,000$ 100% 100%

Vertical A nalysis Example


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Vertical A nalysis ExampleSamp le mpany

Ba lance Shee t (Asse ts )At ecember 31 , 1999 and 1998

% f ta l Asse ts1999 1998 1999 1998

Cash 82 ,000$ 30 ,000$ 17% 8%Acc ts . ec . 120 ,000 100 ,000 25% 26%Inven t ry 87 ,000 82 ,000 18% 21%

Land 101 ,000 90 ,000 21% 23%Equ ipmen t 110 ,000 100 ,000 23% 26%Accum . epr . (17 ,000 ) (15 ,000 ) - % - %

ta l 83 ,000$ 387 ,000$ 100% 100%

$82 ,000 $483 ,000 = 17% rounded$30 ,000 $387 ,000 = 8% rounded


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Sample CompanyBalance Sheet (Liabilities & Stockholders' Equity)

At December 31, 1999 and 1998% of Total Assets

1999 1998 1999 1998Acts. Payable 76,000$ 60,000$ 16% 16%Wages Payable 33,000 17,000 7% 4%Notes Payable 50,000 50,000 10% 13%

Common Stock 170,000 160,000 35% 41%Retained Earnings 154,000 100,000 32% 26%Total 483,000$ 387,000$ 100% 100%

Vertical A nalysis Example

$76,000 $483,000 = 16% rounded


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1999 1998 1997 1996 1995Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$



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1999 1998 1997 1996 1995Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$


$1,991$1,991 -- $1,820 = $171$1,820 = $171


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Trend Percentages ExampleUsing 1995 as the base year, we develop the

following percentage relationships.Wheeler, Inc.

Operating Data1999 1998 1997 1996 1995

Revenues 132% 123% 116% 109% 100%Expenses 120% 116% 110% 106% 100%Net income 313% 234% 203% 158% 100%

$1,991$1,991 -- $1,820 = $171$1,820 = $171$171$171 $1,820 = 9% rounded$1,820 = 9% rounded


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90

100

110

120

130

140

1995 1996 1997 1998 1999

Years

% o

f 1 0 0 B a s e

Sales

Expenses

Tre n d lin efor Sa les


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Ratios can be expressed in three differentways:

1. Ratio (e.g., current ratio of 2:1)2. % (e.g., profit margin of 2%)3. $ (e.g., EPS of $2.25)

CAUTION!Using ratios and percentages without

considering the underlying causes may behazardous to your health!

lead to incorrect conclusions.

Ratios


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C ategories of Ratios

Liquidity RatiosIndicate a companys short-termdebt-paying ability

Equity (Long-Term Solvency) RatiosShow relationship between debt and equityfinancing in a company

Profitability TestsRelate income to other variables

Market TestsH elp assess relative merits of stocks in the

marketplace


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Liquidity RatiosC urrent (working capital) ratioA

cid-test (quick) ratio C ash flow liquidity ratioA ccounts receivable turnover Number of days sales in accountsreceivable

Inventory turnover Total assets turnover

651

10 Ratios You Must Know


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Equity (Long-Term Solvency) RatiosEquity (stockholders equity) ratio

Equity to debt



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Profitability Tests Return on operating assets

Net income to net sales (return onsales or profit marginprofit margin)Return on average commonstockholders equity (ROEROE)

C ash flow marginEarnings per share

Times interest earned

Times preferred dividends earned

$



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Market Tests Earnings yield on common stock

Price-earnings ratio Payout ratio on common stock Dividend yield on common stock Dividend yield on preferred stock C ash flow per share of common

stock



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Now, lets look atNorton

Corporations 1999 an d 1998 financial

statements.


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NOR TON CORPORA TIONBalance Shee ts

December 31, 1999 and 1998

1999 1998Assets

Current assets:Cash 30,000$ 20,000$Accounts receivable, net 20,000 17,000 Inventory 12,000 10,000

Prepaid expenses 3,000 2,000

Total current assets 65,000 49,000 Property and e quipment:

Land 165,000 123,000

Buildings and equipment, net 116,390 128,000

Total property and equipment 281,390 251,000

Total assets 346,390$ 300,000$


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NOR T ON CORPORA TI ONBalance S heets

December 3 1 , 1999 an d 19981999 1998

L iabilities an d S tockhol d ers ' EquityCurrent liabilities:

Accounts payable 3 9 ,000$ 40,000$

Notes payable , short -term 3,000 2,000 T otal current liabilities 42,000 42,000

L ong -term lia bilities:Notes payable, long -term 70,000 78 ,000

T otal liabilities 11 2,000 1 20,000 S tockhol d ers ' equity:

Common stock, $1 par value 27,400 1 7,000

Add itional pa i d -in capital 158 ,1 00 11 3,000 T otal pa i d -in capital 185 ,5 00 1 30,000

Retaine d earnings 4 8 ,89 0 5 0,000 T otal stockhol d ers ' equity 234,3 9 0 18 0,000

T otal liabilities an d stockhol d ers ' equity 34 6 ,3 9 0$ 300,000$


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Now, lets calculatethe 1 0 ratios base d

on Nortons financialstatements.


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N RT N C RP RA TIO N

1999

Cash 30 ,000$ Accoun ts r ece ivab le , ne t

Beg inn ing o f yea r 17 ,000

End o f yea r 20 ,000 In ven to r y

Beg inn ing o f yea r 10 ,000

End o f yea r 12 ,000

To ta l cu rr en t asse ts 65 ,000 To ta l cu rr en t liab ilities 42 ,000

Sa les on accoun t 494 ,000

Cos t o f goods so ld 140 ,000

We willuse this

informationto calculate

the liquidityratios for Norton.


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Working C apital*

12/31/99Curren t asse ts 65 ,000$

Curren t li ab ilities (42 ,000 ) Work ing cap ita l 23 ,000$

The excess of current assets over currentliabilities.

* While this is not a ratio, it does give an

indication of a companys liquidity.


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C urrent (Working C apital)Ratio

CurrentRatio

$65 ,000$42,000

= = 1 .55 : 1

M easures the abilityof the company to pay current

d ebts as they become due.

Current

Ratio

Current Assets

Current L iabilities=

#1#1


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A cid-Test (Quick) Ratio

Quick Assets

Current L iabilities=Aci d -

Test

RatioQuick assets are Cash,M arketable S ecurities,

Accounts Receivable (net) an d

current Notes Receivable.

#2#2


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Quick Assets


Test

RatioNorton Corporations quick

assets consist of cash of $30,000 an d accounts

receivable of $20,000.

A cid-Test (Quick) Ratio#2#2


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Quick Assets


Test

Ratio$5 0,000$42,000 =

1 .19 : 1=Aci d -Test

Ratio

A cid-Test (Quick) Ratio#2#2


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S ales on Account

Average Accounts Receivable

AccountsReceivable

Turnover =

A ccounts ReceivableTurnover

= 26 .70 times$49 4,000

($1 7,000 + $20,000) 2

AccountsReceivable

Turnover =

T his ratio measures how manytimes a company converts its

receivables into cash each year.

#3#3 Average, net accountsreceivable

Net, cre d it sales


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Number of Days Salesin A ccounts Receivable

M easures, on average, how manydays it takes to collect an

account receivable.

Days S alesin Accounts

Receivables

= 365 Days

Accounts Receivable Turnover

= 1 3. 6 7 days=365 Days

26 .70 T imes

Days S alesin AccountsReceivables

#4#4


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Number of Days Salesin A ccounts Receivable

In practice, woul d 45 d ays be adesirable number of days in

receivables?

#4#4Days S alesin Accounts

Receivables

= 365 Days

Accounts Receivable Turnover

= 1 3. 6 7 days=365 Days

26 .70 T imes

Days S alesin AccountsReceivables


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Inventory Turnover

Cost of Goo d s S ol d Average Inventory

InventoryTurnover

=

oul d 5 be adesirable number of timesfor inventory to turnover?

= 1 2.73 times$1 40,000

($1 0,000 + $1 2,000) 2InventoryTurnover

=

#5#5


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Equity, or LongTermSolvency Ratios

This is part of the information to calculatethe equity, or long-term solvency ratios of

Norton C orporation.

NORTON CORPORATION

1999

Net operating income 84,000$Net sales 494,000 Interest expense 7,300 Total stockholders' equity 234,390


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NORTON COR P ORATION1999

Co mm o n sh s o u sta nd ng

Begi nn in g of year 17,000 End of year 27,400

Net i n o m e 53,690$

Stock h ol d ers' eq u ity

Begi nn in g of year 180,000 End of year 234,390

Divid e nd s per s h are 2

Dec. 31 m arket price/s h are 20

In terest expe n se 7,300

Total assets

Begi nn in g of year 300,000

End of year 346,390

Here is t h erest of t h e

in for m atio nw e w ill

u se.


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A/ K/A Return on Sales or Profit

Margin

Net Incometo

Net S ales= Net

Income

Net S ales

Net Incometo

Net S ales= $

5 3, 69 0$49 4,000 =

1 0. 9 %

M easures the proportion of the sales d ollar which is retaine d as profit.

#7#7


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A/ K/A Return on Sales or Profit

Margin

Net Incometo

Net S ales= Net

Income

Net S ales

Net Incometo

Net S ales= $

5 3, 69 0$49 4,000 =

1 0. 9 %

Woul d a 1 % return on sales be goo d ?

#7#7


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Return on A verage C ommonStockholders Equity (ROE)

Return onS tockhol d ersEquity

= NetIncomeAverage Common

S tockhol d ers Equity

=$5 3, 69 0

($18 0,000 + $234,3 9 0) 2 = 25 .9 %

Return on

S tockhol dersEquityImportant measure of theincome -pro d ucing ability

of a company.

#8#8


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Earningsper S hare

Earnings Available to Common S tockhol ders

Weighte d -Average Number of CommonS hares Outstan d ing=

Earningsper S hare

$5 3, 69 0(1 7,000 + 27,400) 2= = $2.42

T he financial press regularly publishesactual an d forecaste d EP S amounts.

#9#9

Earnings Per Share


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Whats new from C hap. 15?Weighted-average calculation

EP S of common stock = _______________________Earnings available tocommon stockhol d ers

Weighte d -average number of common shares outstan d ing

6 44

T hree alternatives for calculatingweighte d -average number of shares

Earnings Per Share


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EP S of common stock = _______________________Earnings available tocommon stockhol d ers

Weighte d -average number of common shares outstan d ing

6 45

Alternate # 1

Earnings Per Share Whats new from C hap. 15?

Weighted-average calculation


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Alternate #3

Alternate #2

6 45

Earnings Per Share


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EPS and Stock Dividends or SplitsWhy restate all prior calculations of EPS?

C omparability - i.e., no additional capital wasgenerated by the dividend or split

6 46

Earnings Per Share

Primary EPS and Fully Diluted EPS APB Opinion No. 15 I mentioned this 17-page pronouncement that

required a 100-page explanation in the lecture for

chapter 13.


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Price-Earnings Ratio A/ K/A P /E Multiple

Price -EarningsRatio

M arket Price Per S hareEP S=

Price -EarningsRatio

= $20.00$ 2.42 = 8 .3 : 1

#10#10

Provi des some measure of whether thestock is un d er or overprice d .


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Important C onsiderations Need for comparable data

Data is provided by Dun &Bradstreet, Standard & Poors etc.

Must compare by industry Is EPS comparable?

Influence of external factors General business conditions Seasonal nature of business operations

Impact of inflation


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T he current ratio is a measure of liqui d ity that is compute d by d ivid ing

total assets by total liabilities.a. T rueb. False

QuestionQuestion

T he current ratio is a measure of liqui d ity, but is compute d by

d ivid ing currentcurrent assets bycurrentcurrent liabilities


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Question Quick assets are defined as C ash,

Marketable Securities and net receivables.

a. Trueb.False


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Quick assets are d efine d as Cash,M arketable S ecurities an d net

receivables.a. T rueb. False

QuestionQuestion


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No more ratios, please!


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A bout Test #1 Best way to study

Notes first Study guide and /or H ermanson tutorialsC alculators will be provided

Must wait outside classroomH

ave your questions ready for next actualclass See course home page for office hours

Sample Fin Analysis

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