Tài chính doanh nghiệp - Chapter 3: Analysis of financial statements

CHAPTER 3Analysis of Financial StatementsRatio AnalysisDu Pont systemEffects of improving ratiosLimitations of ratio analysisQualitative factorsBalance Sheet: Assets CashA/RInventories Total CAGross FALess: Dep. Net FATotal Assets 20027,282 632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592 2003E85,632 878,0001,716,4802,680,1121,197,160 380,120 817,0403,497,152Balance sheet: Liabilities and Equity Accts payable Notes payableAccruals Total CLLong-term debtCommon stockRetained earnings Total EquityTotal L & E 2002524,160 636,808 489,6001,650,568723,432460,000 32,592 492,5922,866,592 2003E436,800 300,000 408,0001,144,800400,0001,721,176 231,1761,952,3523,497,152Income statementSales COGSOther expenses EBITDADepr. & Amort. EBITInterest Exp.EBTTaxesNet income 20026,034,000 5,528,000 519,988(13,988) 116,960(130,948) 136,012(266,960) (106,784)(160,176) 2003E7,035,600 5,875,992 550,000609,608 116,960492,648 70,008422,640 169,056 253,584Other dataNo. of sharesEPSDPSStock priceLease pmts2003E250,000$1.014$0.220$12.17$40,0002002100,000-$1.602$0.110$2.25$40,000Why are ratios useful?Ratios standardize numbers and facilitate comparisons.Ratios are used to highlight weaknesses and strengths.What are the five major categories of ratios, and what questions do they answer?Liquidity: Can we make required payments?Asset management: right amount of assets vs. sales?Debt management: 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?Calculate D’Leon’s forecasted current ratio for 2003.Current ratio = Current assets / Current liabilities = $2,680 / $1,145 = 2.34xComments on current ratio200320022001Ind.Currentratio2.34x1.20x2.30x2.70xExpected to improve but still below the industry average.Liquidity position is weak.What is the inventory turnover vs. the industry average?200320022001Ind.InventoryTurnover4.1x4.70x4.8x6.1xInv. turnover = Sales / Inventories = $7,036 / $1,716 = 4.10xComments on Inventory TurnoverInventory turnover is below industry average.D’Leon might have old inventory, or its control might be poor.No improvement is currently forecasted.DSO is the average number of days after making a sale before receiving cash.DSO = Receivables / Average sales per day = Receivables / Sales/365 = $878 / ($7,036/365) = 45.6Appraisal of DSO200320022001Ind.DSO45.638.237.432.0D’Leon collects on sales too slowly, and is getting worse.D’Leon has a poor credit policy.Fixed asset and total asset turnover ratios vs. the industry averageFA turnover = Sales / Net fixed assets = $7,036 / $817 = 8.61xTA turnover = Sales / Total assets = $7,036 / $3,497 = 2.01xEvaluating the FA turnover and TA turnover ratios200320022001Ind.FA TO8.6x6.4x10.0x7.0xTA TO2.0x2.1x2.3x2.6xFA turnover projected to exceed the industry average.TA turnover below the industry average. Caused by excessive currents assets (A/R and Inv).Calculate the debt ratio, TIE, and EBITDA coverage ratios.Debt ratio = Total debt / Total assets = ($1,145 + $400) / $3,497 = 44.2% TIE = EBIT / Interest expense = $492.6 / $70 = 7.0xCalculate the debt ratio, TIE, and EBITDA coverage ratios. EBITDA = (EBITDA+Lease pmts)coverage Int exp + Lease pmts + Principal pmts = $609.6 + $40 $70 + $40 + $0 = 5.9xHow do the debt management ratios compare with industry averages?200320022001Ind.D/A44.2%82.8%54.8%50.0%TIE7.0x-1.0x4.3x6.2xEBITDA coverage5.9x0.1x3.0x8.0xD/A and TIE are better than the industry average, but EBITDA coverage still trails the industry.Profitability ratios: Profit margin and Basic earning powerProfit margin = Net income / Sales = $253.6 / $7,036 = 3.6% BEP = EBIT / Total assets = $492.6 / $3,497 = 14.1%Appraising profitability with the profit margin and basic earning power200320022001Ind.PM3.6%-2.7%2.6%3.5%BEP14.1%-4.6%13.0%19.1%Profit margin was very bad in 2002, but is projected to exceed the industry average in 2003. Looking good.BEP removes the effects of taxes and financial leverage, and is useful for comparison.BEP projected to improve, yet still below the industry average. There is definitely room for improvement.Profitability ratios: Return on assets and Return on equityROA = Net income / Total assets = $253.6 / $3,497 = 7.3%ROE = Net income / Total common equity = $253.6 / $1,952 = 13.0%Appraising profitability with the return on assets and return on equity200320022001Ind.ROA7.3%-5.6%6.0%9.1%ROE13.0%-32.5%13.3%18.2%Both ratios rebounded from the previous year, but are still below the industry average. More improvement is needed.Wide variations in ROE illustrate the effect that leverage can have on profitability.Effects of debt on ROA and ROEROA is lowered by debt--interest lowers NI, which also lowers ROA = NI/Assets.But use of debt also lowers equity, hence debt could raise ROE = NI/Equity.Problems with ROEROE and shareholder wealth are correlated, but problems can arise when ROE is the sole measure of performance.ROE does not consider risk.ROE does not consider the amount of capital invested.Might encourage managers to make investment decisions that do not benefit shareholders.ROE focuses only on return. A better measure is one that considers both risk and return.Calculate the Price/Earnings, Price/Cash flow, and Market/Book ratios.P/E = Price / Earnings per share = $12.17 / $1.014 = 12.0xP/CF = Price / Cash flow per share = $12.17 / [($253.6 + $117.0) ÷ 250] = 8.21xCalculate the Price/Earnings, Price/Cash flow, and Market/Book ratios.M/B = Mkt price per share / Book value per share = $12.17 / ($1,952 / 250) = 1.56x200320022001Ind.P/E12.0x-1.4x9.7x14.2xP/CF8.21x-5.2x8.0x11.0xM/B1.56x0.5x1.3x2.4xAnalyzing the market value ratiosP/E: How much investors are willing to pay for $1 of earnings.P/CF: How much investors are willing to pay for $1 of cash flow.M/B: How much investors are willing to pay for $1 of book value equity.For each ratio, the higher the number, the better.P/E and M/B are high if ROE is high and risk is low.Extended DuPont equation: Breaking down Return on equityROE = (Profit margin) x (TA turnover) x (Equity multiplier) = 3.6% x 2 x 1.8 = 13.0%PMTA TOEMROE20012.6%2.32.213.3%2002-2.7%2.15.8-32.5%2003E3.6%2.01.813.0%Ind.3.5%2.62.018.2%The Du Pont systemAlso can be expressed as:ROE = (NI/Sales) x (Sales/TA) x (TA/Equity)Focuses on:Expense control (PM)Asset utilization (TATO)Debt utilization (Eq. Mult.)Shows how these factors combine to determine ROE.Trend analysisAnalyzes a firm’s financial ratios over timeCan be used to estimate the likelihood of improvement or deterioration in financial condition.An example:The effects of improving ratiosA/R 878 Debt 1,545 Other CA 1,802 Equity 1,952Net FA 817 _____TA 3,497 Total L&E 3,497Sales / day = $7,035,600 / 365 = $19,275.62How would reducing the firm’s DSO to 32 days affect the company?Reducing accounts receivable and the days sales outstandingReducing A/R will have no effect on salesOld A/R = $19,275.62 x 45.6 = $878,000New A/R = $19,275.62 x 32.0 = $616,820 Cash freed up: $261,180Initially shows up as addition to cash.Effect of reducing receivables on balance sheet and stock priceAdded cash $261 Debt 1,545A/R 617 Equity 1,952Other CA 1,802 Net FA 817 _____Total Assets 3,497 Total L&E 3,497What could be done with the new cash?How might stock price and risk be affected?Potential uses of freed up cashRepurchase stockExpand businessReduce debtAll these actions would likely improve the stock price.Potential problems and limitations of financial ratio analysisComparison with industry averages is difficult for a conglomerate firm that operates in many different divisions.“Average” performance is not necessarily good, perhaps the firm should aim higher.Seasonal factors can distort ratios.“Window dressing” techniques can make statements and ratios look better.More issues regarding ratiosDifferent operating and accounting practices can distort comparisons.Sometimes it is hard to tell if a ratio is “good” or “bad”.Difficult to tell whether a company is, on balance, in strong or weak position.Qualitative factors to be considered when evaluating a company’s future financial performanceAre the firm’s revenues tied to 1 key customer, product, or supplier?What percentage of the firm’s business is generated overseas?CompetitionFuture prospectsLegal and regulatory environment