Kế toán, kiểm toán - Chapter 8: Analysis of financial statements

CHAPTER 8Analysis of Financial Statements1Topics in ChapterRatio analysisDu Pont systemEffects of improving ratiosLimitations of ratio analysisQualitative factors2Income Statement20092010ESales$5,834,400 $7,035,600COGS4,980,000 5,800,000Other expenses720,000 612,960Deprec.116,960 120,000 Tot. op. costs5,816,960 6,532,960 EBIT17,440 502,640Int. expense176,000 80,000 EBT(158,560)422,640Taxes (40%)(63,424)169,056Net income($ 95,136)$ 253,5843Balance Sheets: Assets20092010ECash$ 7,282 $ 14,000S-T invest.20,000 71,632AR632,160 878,000Inventories1,287,360 1,716,480 Total CA1,946,802 2,680,112 Net FA939,790 836,840Total assets$2,886,592 $3,516,9524Balance Sheets: Liabilities & Equity20092010EAccts. payable$ 324,000 $ 359,800Notes payable720,000 300,000Accruals284,960 380,000 Total CL1,328,960 1,039,800Long-term debt1,000,000 500,000Common stock460,000 1,680,936Ret. earnings97,632 296,216 Total equity557,632 1,977,152Total L&E$2,886,592 $3,516,9525Other Data20092010EStock price$6.00$12.17# of shares100,000 250,000EPS-$0.95$1.01DPS$0.11$0.22Book val. per sh.$5.58$7.91Lease payments$40,000$40,000Tax rate0.40.46Why are ratios useful?Standardize numbers; facilitate comparisonsUsed to highlight weaknesses and strengths7Five Major Categories of RatiosLiquidity: Can we make required payments as they fall due?Asset management: Do we have the right amount of assets for the level of sales?(More)8Ratio Categories (Continued)Debt management: Do we have the 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 value: Do investors like what they see as reflected in P/E and M/B ratios?9Forecasted Current and Quick Ratios for 2010.CR10 = = = 2.58.QR10 == = 0.93.CACL$2,680$1,040$2,680 - $1,716$1,040CA - Inv.CL10Comments on CR and QR2010E20092008Ind.CR2.581.462.32.7QR0.930.50.81.0Expected to improve but still below the industry average.Liquidity position is weak.11Inventory Turnover Ratio vs. Industry AverageInv. turnover = = = 4.10.SalesInventories$7,036$1,716 2010E 2009 2008 Ind.Inv. T. 4.1 4.5 4.8 6.112Comments on Inventory TurnoverInventory turnover is below industry average.Firm might have old inventory, or its control might be poor.No improvement is currently forecasted.13DSO = = = = 45.5 days. ReceivablesAverage sales per day$878$7,036/365ReceivablesSales/365DSO: average number of days from sale until cash received.14Appraisal of DSOFirm collects too slowly, and situation is getting worse.Poor credit policy. 2010 2009 2008 Ind.DSO 45.5 39.5 37.4 32.015Total assetsturnover== = 2.00.      Sales        Total assets$7,036$3,517Fixed assetsturnover     Sales             Net fixed assets== = 8.41.$7,036$837(More)Fixed Assets and Total AssetsTurnover Ratios      16Fixed Assets and Total AssetsTurnover RatiosFA turnover is expected to exceed industry average. Good.TA turnover not up to industry average. Caused by excessive current assets (A/R and inventory).2010E20092008Ind.FA TO8.46.210.07.0TA TO2.02.02.32.517 Total liabilities Total assetsDebt ratio = = = 43.8%.$1,040 + $500$3,517            EBIT         Int. expense TIE = = = 6.3.$502.6$80(More)Calculate the debt, TIE, and EBITDA coverage ratios.18 = = 5.5.EBIT + Depr. & Amort. + Lease payments Interest Lease expense pmt. + + Loan pmt. $502.6 + $120 + $40 $80 + $40 + $0EBITDA Coverage (EC)19Recapitalization improved situation, but lease payments drag down EC. 2010E 2009 2008 Ind.D/A 43.8% 80.7% 54.8% 50.0%TIE 6.3 0.1 3.3 6.2EC 5.5 0.8 2.6 8.0Debt Management Ratios vs. Industry Averages20Very bad in 2009, but projected to meet industry average in 2010. Looking good.Profit Margin (PM) 2010E 2009 2008 Ind.PM 3.6% -1.6% 2.6% 3.6% PM = = = 3.6%. NI Sales$253.6$7,03621BEP = = = 14.3%. EBIT Total assets $502.6 $3,517(More)Basic Earning Power (BEP)22Basic Earning Power vs. Industry AverageBEP removes effect of taxes and financial leverage. Useful for comparison.Projected to be below average.Room for improvement. 2010E 2009 2008 Ind.BEP 14.3% 0.6% 14.2% 17.8%23ROA = = = 7.2%. NI Total assets $253.6 $3,517(More)Return on Assets (ROA)and Return on Equity (ROE)24ROE = = = 12.8%. NI Common Equity $253.6 $1,977(More)Return on Assets (ROA)and Return on Equity (ROE)25 2010E 2009 2008 Ind.ROA 7.2% -3.3% 6.0% 9.0%ROE 12.8% -17.1% 13.3% 18.0%Both below average but improving.ROA and ROE vs. Industry Averages26Effects of Debt on ROA and ROEROA is lowered by debt--interest expense lowers net income, which also lowers ROA.However, the use of debt lowers equity, and if equity is lowered more than net income, ROE would increase.27Price = $12.17.EPS = = = $1.01.P/E = = = 12. NI Shares out.$253.6250Price per shareEPS$12.17$1.01Calculate and appraise theP/E, P/CF, and M/B ratios.28Industry P/E RatiosIndustryTicker*P/EBankingSTI14.07SoftwareMSFT22.94DrugPFE19.49Electric UtilitiesDUK16.57SemiconductorsINTC22.36SteelNUE13.48TobaccoMO16.78S&P 500 17.83*Ticker is for typical firm in industry, but P/E ratio is for the industry, not the individual firm; www.investor.reuters.com, March 2008.29 NI + Depr. Shares out.CF per share = = = $1.49.$253.6 + $120.0250 Price per share Cash flow per share P/CF = = = 8.2.$12.17$1.49Market Based Ratios30 Com. equity Shares out.BVPS = = = $7.91.$1,977250 Mkt. price per share Book value per share M/B = = = 1.54.$12.17$7.91Market Based Ratios (Continued)31Interpreting Market Based RatiosP/E: How much investors will pay for $1 of earnings. Higher is better.M/B: How much paid for $1 of book value. Higher is better.P/E and M/B are high if ROE is high, risk is low.32 2010E 2009 2008 Ind.P/E 12.0 -6.3 9.7 14.2P/CF 8.2 27.5 8.0 7.6M/B 1.5 1.1 1.3 2.9Comparison with Industry Averages33Common Size Balance Sheets:Divide all items by Total AssetsAssets200820092010EInd.Cash0.6%0.3%0.4%0.3%ST Inv.3.3%0.7%2.0%0.3%AR23.9%21.9%25.0%22.4%Invent.48.7%44.6%48.8%41.2%Total CA76.5%67.4%76.2%64.1%Net FA23.5%32.6%23.8%35.9%TA100.0%100.0%100.0%100.0%34Divide all items by Total Liabilities & EquityAssets200820092010EInd.AP9.9%11.2%10.2%11.9%Notes pay.13.6%24.9%8.5%2.4%Accruals9.3%9.9%10.8%9.5%Total CL32.8%46.0%29.6%23.7%LT Debt22.0%34.6%14.2%26.3%Total eq.45.2%19.3%56.2%50.0%Total L&E100.0%100.0%100.0%100.0%35Analysis of Common Size Balance SheetsComputron has higher proportion of inventory and current assets than Industry.Computron now has more equity (which means LESS debt) than Industry.Computron has more short-term debt than industry, but less long-term debt than industry.36Common Size Income Statement:Divide all items by Sales200820092010EInd.Sales100.0%100.0%100.0%100.0%COGS83.4%85.4%82.4%84.5%Other exp.9.9%12.3%8.7%4.4%Depr.0.6%2.0%1.7%4.0% EBIT6.1%0.3%7.1%7.1%Int. Exp.1.8%3.0%1.1%1.1% EBT4.3%-2.7%6.0%5.9%Taxes1.7%-1.1%2.4%2.4%NI2.6%-1.6%3.6%3.6%37Analysis of Common Size Income StatementsComputron has lower COGS (86.7) than industry (84.5), but higher other expenses. Result is that Computron has similar EBIT (7.1) as industry.38Percentage Change Analysis: % Change from First Year (2008)Income St.200820092010ESales0.0%70.0%105.0%COGS0.0%73.9%102.5%Other exp.0.0%111.8%80.3%Depr.0.0%518.8%534.9% EBIT0.0%-91.7%140.4%Int. Exp.0.0%181.6%28.0% EBT0.0%-208.2%188.3%Taxes0.0%-208.2%188.3%NI0.0%-208.2%188.3%39Analysis of Percent Change Income StatementWe see that 2010 sales grew 105% from 2008, and that NI grew 188% from 2008.So Computron has become more profitable.40Percentage Change Balance Sheets: AssetsAssets200820092010ECash0.0%-19.1%55.6%ST Invest.0.0%-58.8%47.4%AR0.0%80.0%150.0%Invent.0.0%80.0%140.0%Total CA0.0%73.2%138.4%Net FA0.0%172.6%142.7%TA0.0%96.5%139.4%41Percentage Change Balance Sheets: Liabilities & EquityLiab. & Eq.200820092010EAP0.0%122.5%147.1%Notes pay.0.0%260.0%50.0%Accruals0.0%109.5%179.4%Total CL0.0%175.9%115.9%LT Debt0.0%209.2%54.6%Total eq.0.0%-16.0%197.9%Total L&E0.0%96.5%139.4%42Analysis of Percent Change Balance SheetsWe see that total assets grew at a rate of 139%, while sales grew at a rate of only 105%. So asset utilization remains a problem.43Explain the Du Pont SystemThe Du Pont system focuses on:Expense control (PM)Asset utilization (TATO)Debt utilization (EM)It shows how these factors combine to determine the ROE.44( )( )( ) = ROE ProfitmarginTAturnoverEquitymultiplier NI SalesSalesTA TA CExx= ROEThe Du Pont System452008: 2.6% x 2.3 x 2.2 = 13.2%2009: -1.6% x 2.0 x 5.2 = -16.6%2010: 3.6% x 2.0 x 1.8 = 13.0%Ind.: 3.6% x 2.5 x 2.0 = 18.0% NI SalesSalesTA TA CExx= ROEThe Du Pont System46Potential Problems and Limitations of Ratio Analysis?Comparison with industry averages is difficult if the firm operates many different divisions.“Average” performance is not necessarily good.Seasonal factors can distort ratios.(More)47Problems and Limitations (Continued)Window dressing techniques can make statements and ratios look better.Different accounting and operating practices can distort comparisons.(More)48Problems and Limitations (Continued)Sometimes it is difficult to tell if a ratio value is “good” or “bad.”Often, different ratios give different signals, so it is difficult to tell, on balance, whether a company is in a strong or weak financial condition.49Qualitative FactorsAre the company’s revenues tied to a single customer?To what extent are the company’s revenues tied to a single product?To what extent does the company rely on a single supplier?(More)50Qualitative Factors (Continued)What percentage of the company’s business is generated overseas?What is the competitive situation?What does the future have in store?What is the company’s legal and regulatory environment?51